Failing 414(s) Test...how to correct

[BG5150]

Plan excludes Holiday bonuses.  Owners (the only HCEs) don't take that bonus.  Plan is failing 414(s).

How do I correct it? 

(It's been a long time since I had a 414(s) test)

[BG5150]

Match is SH 100% up to 4%

[CuseFan]

Retroactively amend to include those bonuses? Don't know what else can be done, unless this means not SH and you run ADP and ACP tests using gross pay rather than plan comp in your denominators.

Wouldn't / shouldn't this have been known ahead of time and been addressed before it became a problem? Was it an amendment, always in the plan, these were never paid before. Obviously the horse is already out of the barn and we have to get him back in - but the barn still needs to get fixed.

[RatherBeGolfing]

29 minutes ago, CuseFan said:

Retroactively amend to include those bonuses?

Agreed.

I have had to have this conversation so many times. 

"But we only give bonuses to the staff, we don't even take one for ourselves, how is this fair???" 

Well...  When you exclude something you only give to rank and file employees, you are taking something away from only rank and file employees.  

[CuseFan]

Or trying to explain when the HCEs do get bonuses that are otherwise excluded from plan compensation that it's still discriminatory because they're already over the compensation limit. Fun times!

[BG5150]

Does anyone have any good resources on how to correct stuff like this?  Changing jobs over the years I've lost what I'm sure was a spot-on webinar on the topic.

[ESOP Guy]

You can try and pass the General Test with the compensation excluded (that last part is the part I am least sure about) and if that passes.  I do know you can do the General Test.   

The other thing you can do is find out how aggressive people are willing to be on what de minimis is.  I have seen some attorneys allow as much as a 5% point spread. 

 

I know not answering your question.  I don't have a good resource. 

[BG5150]

General test for the match?

[ESOP Guy]

On 9/24/2026 at 2:43 PM, BG5150 said:

General test for the match?

I have to admit it has been over 12 years since I had a 414(s) failure in a 401(k) plan I worked on.  I just a few months ago had an ESOP that failed and we did a general test on it.  That was shy it was fresh in my head.    Sorry, I can be more help and sorry for slow reply.  I have been so busy getting read for a vacation I haven't come around here much the past few days. 

[John Feldt ERPA CPC QPA]

If the plan is not safe harbor, you follow the terms of the plan and allocate the match using the discriminatory definition of pay. But when you run the ACP test, you test using a nondiscriminatory definition of pay. Correct the failed ACP test as usual.

Some argue that this creates multiple rates of match and that needs a BRF test to be done.

if the plan is safe harbor:

Some argue that there is no self correction, that you have to submit your idea for correction to the IRS, meaning it was a bad trade to replace the ADP/ACP test for a 414(s) test.

Others argue that you redetermine what employees would have deferred under a definition of comp that passes 414(s), count that as a missed deferral to be corrected, and redetermine the match based on that, and retroactively amend the comp definition. The problem here is that the safe harbor rules under IRS Notice 2016-16 don’t say the plan can be retroactively amended like that. And, how do you know what employees would have deferred from that bonus, do you assume they would all defer enough to get the maximum match?

Still others argue that the plan simply lost the benefit of being safe harbor such that ADP and ACP testing applies. If you can find that as the requirement in the plan document, great, then do that. And go back to the first option listed in this post for a plan that is not safe harbor.