Related employers, Safe Harbor/Profit Sharing allocation, 414s test

Hello,

Two entities (A & B), controlled group, each entity has its own plan.  Entity A provides SH 3% + PS, entity B provides PS only.

Entity A calculates SH and PS based on entity A's compensation only.  Entity B calculates PS based on entity B's compensation only.

Each plan passes coverage on its own.

Each plan passes 401(a)(4) based on 415 compensation (combined comp from both entities).  Gateway and TH are calculated based on 415 comp.

My question is... do I need to do the 414(s) compensation ratio test for the Safe Harbor contribution type for entity A, because the Safe Harbor allocation is not based on 414(s) compensation?

I thought... since 415 compensation is used for the 401(a)(4) test, which tests both SH and PS, I did not have to do a separate 414(s) compensation test....... But maybe that's the reason why I have to do the 414(s) compensation test, because testing both SH and PS cannot be used to prove that the Safe Harbor (alone) is calculated based on 414s compensation?

If so, what happens if the 414(s) compensation test fails?  Increase SH to meet 3% of the 415 compensation?  I guess increasing SH will reduce PS anyway, so the outcome is the same for the 401(a)(4) test....

Thank you very much!

The compensation definition used to calculate the safe harbor contribution must satisfy 414(s). See 1.401(k)-3(b)(2). So, yes you need to test it under 414(s). If the test fails, your plan document may have a provision telling you what to do. Our VS document (from ASC) has a provision that if you fail 414(s) on the SH compensation, the SH comp definition automatically changes to Total Compensation. If your plan doesn't have a similar provision, you would need an -11(g) amendment to change the SH comp definition for the year.