Definition of Compensation - excluding gift cards

[Tom]

 

We have a client that gives about 100 employees varying gift cards throughout the year.  They do not want the gift card included in compensation for employer contribution purposes.  Total gift cards provided might be $10,000 on NHCE wages of $15,000,000.  

This will certainly pass the generally accepted 3% spread for compensation testing.  But I see one IRS requirement that says the definition "does not by design favor highly compensated employees."  This clearly does because the HCEs do not get gift cards so they have no comp reduction (but which is irrelevant since they earn well over $345,000.) It would probably be ok to exclude but then we'd have to get reduced compensation from the client.  

My question is- we can reduce plan comp by the gift cards for contribution allocation purposes but can we use the same reduced compensation definition for testing purposes (this is K/DB combination.)  I wouldn't want a small inadvertent error to cause a testing problem, minimum gateway or top-heavy minimum violation. 

Comments?

Thank you, Tom

[CuseFan]

If the plan compensation (excluding gift cards) passes non-discrimination testing then you may use that as your testing compensation and gateway, but top heavy (if applicable) must be based on total compensation.

[Sully]

Can you use the reduced compensation for the 5% gateway minimum in a DC Plan? I thought you had to use total 415 Comp.

Thanks.