Compensation Ratio Test

A plan uses the alternate safe harbor for 414 comp, excluding fringe benefits, deferred comp, welfare benefits, etc., for purposes of allocating their nonelective contribution.

Additionally, now the client would like to exclude overtime and bonuses.

Question, for purposes of the compensation ratio test, am I starting with my alternate 414 comp as my base for the test, and using only the excluded overtime and bonuses in the ratio.  Or am I starting with all compensation, and excluding all of the excluded comp in the ratio.

For example, assume total comp of $50,000, including $1000 in fringe benefits and a $5000 bonus.

Is the compensation ratio 88% ($44000/$50000), in other words, starting at $50k and reducing comp by all of the excluded comp?

Or is the compensation ratio 89.8% ($44000/$49000), in other words, first reducing the $50 by the $1000 fringe to arrive at a "base" 414 comp, then excluding the bonus?

Hopefully I've phrased that correctly, and appreciate any insights.

Thanks.

You're comparing all exclusions (safe harbor and non safe harbor) to total Compensation.  This can create quite an anomaly. You can have a definition of Compensation with only safe harbor exclusions that would otherwise fail the Compensation Ratio Test.  Excluding bonuses or Overtime may actually help the ratio, but you still fail the test; and find that you're not safe harbor.  I confronted this once many years ago.  I documented this anomaly and had to client change the definition of Compensation.  It doesn't seem logical, but that it how the test seems to be applied.

Good Luck!

Got it.  Total comp less all exclusions compared to total comp.  I guess that makes sense.

Thanks very much.

I would look at it this way.

 Anytime some type of comp is excluded you need to run a comp test, but wait, since it is only fringe benefits that no matter what the results you get a free ride.

not much different than 'running' a top heavy test and saying, but wait, I get a free ride since this is a safe harbor and no other contributions are made.

or, I made a profit sharing contribution to the plan. I need to run a nondiscrim test, but wait, since the allocation was comp to comp I get a free ride.