PS Testing - Dual Eligibility - Compensation Exclusions

Hi all,

I'd love to hear your opinions on this, because I've had a bear of time trying to find an explicit citation that addresses my thoughts one way or the other.

I have a 401(k) Plan with the following eligibility conditions: deferrals & SHNE, Age 21 & 6 months, immediate entry upon eligibility, profit sharing, Age 21 & 1 Year of Service, entry 1/1 & 7/1.

The Plan document reads "For allocation purposes of the 5% Gateway Contribution described under (A) of subsection (iii) above, 415 Compensation shall be determined for the Plan Year (rather than the Limitation Year) but shall exclude 415 Compensation paid while an Employee is not a Participant in the Plan." (It's a Relius document.)

I have 3 individuals who were participants in the deferral and SHNE components of the Plan for the entire year, but entered the PS component on 7/1, so they have partial year excludable comp for a particular Plan component, but they've received 401(a) contributions the entire year. Is their 5% gateway test compensation based on their post-PS entry compensation or their full year comp?

An additional question boils down to is compensation paid prior to participation in a certain component of the Plan a 414(s) safe harbor exclusion or is it only compensation paid prior to overall Plan participation? Does it matter if two different components which are both 401(a) contributions have different pre-participation compensation amounts?

Even more simple question, can someone point me to where pre-participation comp as a 414(s) safe harbor exclusion originates? I've found lots of articles saying so, but I seem to be reading past the primary source language listing this.

The gateway is a nondiscrimination test on the nonelective contributions they're making, so I suspect you would use the compensation for the period the employee was eligible to receive nonelective contributions.  In this case, since the SH entry date is earlier and it's made as a nonelective, that earlier entry date is the relevant starting date for the compensation determination.  If they used a SHM then I'd suggest the opposite.

15 hours ago, OrderOfOps said:

Even more simple question, can someone point me to where pre-participation comp as a 414(s) safe harbor exclusion originates? I've found lots of articles saying so, but I seem to be reading past the primary source language listing this.

It's actually not in 414(s), it's from the definition of "Plan Year Compensation" in 1.401(a)(4)-12. So it's not technically correct to say that it's a 414(s) definition but it is nevertheless allowable for most testing purposes.

Quote

Plan year compensation -

(1) In general. Plan year compensation means section 414(s) compensation for the plan year determined by measuring section 414(s) compensation during one of the periods described in paragraphs (2) through (4) of this definition. Whichever period is selected must be applied uniformly to determine the plan year compensation of every employee.

(2) Plan year. This period consists of the plan year.

(3) Twelve-month period ending in the plan year. This period consists of a specified 12-month period ending with or within the plan year, such as the calendar year or the period for determining benefit accruals described in § 1.401(a)(4)-3(f)(6).

(4) Period of plan participation during the plan year. This period consists of the portion of the plan year during which the employee is a participant in the plan. This period may be used to determine plan year compensation for the plan year in which participation begins, the plan year in which participation ends, or both. This period may be used to determine plan year compensation when substituted for average annual compensation in § 1.401(a)(4)-3(e)(2)(ii)(A) only if the plan year is also the period for determining benefit accruals under the plan rather than another period as permitted under § 1.401(a)(4)-3(f)(6). Further, selection of this period must be made on a reasonably consistent basis from plan year to plan year in a manner that does not discriminate in favor of HCEs.

(5) Special rule for new employees. Notwithstanding the uniformity requirement of paragraph (1) of this definition, if employees' plan year compensation for a plan year is determined based on a 12-month period ending within the plan year under paragraph (3) of this definition, then the plan year compensation of any employees whose date of hire was less than 12 months before the end of that 12-month period must be determined uniformly based either on the plan year or on the employees' periods of participation during the plan year, as provided in paragraphs (2) and (4), respectively, of this definition.