Excluded Employee Compensation

Let's say an employee works at 2 different division within a company. At Division A, he earns $10,000 for the year. At Division B, he earns $20,000 for the year. Let's say he already met the eligibility/entry date requirements. The plan document excludes Division A from the Plan. Let's say the company does a 3% Safe Harbor Profit Sharing and a 2% Profit Sharing. What compensation would be counted for these contribution percentages? Would the whole $30,000 compensation be counted or just the $20,000 from Division B? Let's say the plan document does not clarify this particular situation.

Thanks.

Is comp for full year, or only considered when a participant.  The doc should address that, at least.

The comp is full year, not from entry date.

I would say you combine the comps.

well, possibly for guidance you could rely on the LRM dated 10/2017 (which is the same as the LRM dated 10/2011, so this isn't a change.

it sounds like you are saying  he was in div A part of the year and div B the rest of the year.

 LRM = required modifications

see page 128

The employer will specify in written instructions to the plan administrator or trustee, by no later than the due date of the employer’s tax return for the year to which the employer’s contribution relates, the portion of such contribution to be allocated to each participant allocation group. The employer contributions allocated to each participant allocation group will be allocated among the employees in that group in the ratio that each employee’s compensation, as defined in section _____ of the plan, bears to the total compensation of all employees in the group. In the event that an eligible employee is included in more than one participant allocation group, the participant’s share of the employer contribution allocated to each such group will be based on the participant’s compensation for the part of the year the participant was in the group.

lrm 2017.pdf

It's a matter of following what the plan document says.

You've said that the plan allocates based on full year compensation, not just compensation for the portion of the plan year during which the individual was eligible.  However, you'll need to track through the plan's definitions to see whether "compensation" includes pay from any employer in the controlled group or from only participating employers (or in your case, participating divisions).

Let's look at two distinct fact patterns:
Company has Division A & Division B
Plan Excludes Division B
During the Plan Year, Employee moves from Division B to Division A.
The employee has already met the age/service requirements for the plan and was excluded only be virtue of being employed by Division B.
Employee had already earned $10K working with Division B
Employee Earns $20K working with Division A
The plan defines Compensation is "Eligible Period Only".

In this case, you'd used only the $20K for allocation purposes and testing purposes.  However, this would necessitate a Compensation Ratio Test (which will not be majorly impacted) for the $10K in exclusions since this exclusion was not under a statutory exemption (safe harbor).

However, if the plan defines Compensation as full year, then you'd use the whole $30K, because once he becomes eligible at any point during the year, you're using all his Compensation received from the Employer during that year.

Good Luck!
 

of course, the cite I quoted is for allocation groups, and that would be slightly different than your situation. on the other hand, if Div A was union (excluded) and Div B was nonunion I don't think you would use total comp. I'm not sure this is any different- one group excluded and another included, but I can't say 100% for sure.

The 3% safe harbor is going to have to be on all comp from the employer, assuming the employee is an NHCE. The additional 2% will depend on the way the plan is written. Most likely the plan doc will include all compensation, even though it will say only Division B employees get an allocation. Could be interpreted different ways perhaps depending on whether the employment by the two divisions is in series or parallel.

14 hours ago, Luke Bailey said:

The 3% safe harbor is going to have to be on all comp from the employer, assuming the employee is an NHCE.

This is not true.  It's going to have to be all 'eligible' comp.  The plan gets the define its Compensation for different plan purposes; and you must follow those plan terms when you're allocating contributions. How you test the plan when you exclude portions of Compensation that are not 'statutorily excludable' is another story.  But, you must follow plan terms with respect to how the Contributions are calculated.

Good Luck!

Just wanted to provide some clarification about this particular situation, if it changes anything. The participant in question is actually working at both of the Divisions (the included and the excluded divisions) at the same time. Would you agree that we have to run the Compensation Ratio test to determine if the exclusions are discriminatory?

Thanks,

When I said "all comp from the employer," I intended to the stress to be on "from the employer." Yes, any 414(s)-compliant definition of comp can be used, but I question whether excluding comp just because it was earned in a different division of the employer would be reasonable under 1.414(s)-1(d)(2).  In response to Vlad401(k)'s follow-up, it would seem at a minimum, even if 1.414(s)-1(d)(2) doesn't stop you, that the individual's comp from both divisions will be in the denominator of his 414(s) fraction, although if this individual is the only one with the issue and there are many other participants, the 414(s) nondiscrimination test would probably still be satisfied.

If you work in a division that is excluded from participating in the plan, then you will not benefit from Compensation received while working for that division.  This is purely a plan design issue.  You can easily write a plan to say that if you become eligible at any time during the year, then your entire Compensation (including the period of ineligibility) will be used.  You must follow whatever language you decide to use.  Any debate on whether or not it is reasonable is moot because you're merely following the terms of the plan.  This is 'part' of what it means to have a definitely determinable allocation formula.  You follow the formula, first.  Then you perform whatever tests are necessary to show it to be nondiscriminatory.  You don't get to arbitrarily decide that you're going to use Compensation for the entire year for a single participant.
With that said, when you exclude amounts from Compensation that are not "Safe Harbor" exclusions, you must test that definition of Compensation to prove that it is non-discriminatory.  So, yes, a Compensation Ratio test would be necessary.  You don't get to arbitrarily decide to use another definition of Compensation.  Should you test the Compensation and it fails, many plans have provisions that automatically prescribe using total Compensation for allocation purposes.  Again, you're still following the written terms of your plan.
Many of these issues are already anticipated and addressed in the plans language.  Nothing should be an arbitrary decision such as using total year compensation for a participant (including the period of time they were not eligible) without this practice being supported in the plan's document.

Good Luck!

13 hours ago, Vlad401k said:

Just wanted to provide some clarification about this particular situation, if it changes anything. The participant in question is actually working at both of the Divisions (the included and the excluded divisions) at the same time. Would you agree that we have to run the Compensation Ratio test to determine if the exclusions are discriminatory?

 

Thanks,

Yes. 
 

Any time you have exclusions from Compensation that aren't considered safe harbor exclusions, then you must test the definition of Compensation to prove it's non-discriminatory.

Good Luck!

I agree of course that you follow the plan doc. I would check the definitions in it very carefully, however, to see if they in fact say that the comp from a division of the employer that is not included in the contribution provisions is excluded. I have to think there are lots of documents, both individually designed and preapproved, that have clear provisions for limiting the allocation of contributions to employees in a particular group, but nevertheless in making the allocation count all comp from the plan's adopting employer, if not its entire controlled group. But I could be guessing wrong on that. If Vlad401(k) is still following this thread, would be interesting to know what he has discovered re what the plan doc in question says.

Can you check with the people who wrote the document?  (Not the people who filled out the adoption agreement or whatever, but the VS or Prototype sponsor.)