Exclude deferrals from bonus from SH Match?

Is it permitted to exclude any elective deferrals made from year end bonus pay from the SH match?  if so, how are those amounts tested for ADP/ACP?  Does that throw out the entire ACP safe harbor and test is run as it normally would be?  What then about those elective deferrals that have no SH match?  Are they tested separately?

What is the plan's definition of compensation?

Is the definition non-discriminatory under §414(s)?

Yes, I should have mentioned that it will pass 414(s).  The Plan will allow me to exclude bonus comp from receiving Match which includes SH Match.  

I'm pretty sure if your Plan's definition excludes bonus from match and the plan passes 414(s) testing on your definition of comp you are done. I don't recall this throwing you out of Safe Harbor or or requiring any additional ADP/ACP testing.

If someone has a citation to counter that I'd be interested because we often don't do a lot with excluding comp in practice because in small plans 414(s) is often a problem.

No, this could easily disqualify your plan.  Don't do it.

It sounds like you are suggesting that elective deferrals can be made from bonuses but that any deferrals from bonuses be excluded from matching contribution computations.  However, all you'd need is one NHCE with a bonus that is higher as a percentage of his/her pay than the HCE receiving the lowest bonus among HCEs and you will have violated Treas. Reg. Section 1.401(k)-3(c)(4) if the match is the safe harbor contribution and Treas. Reg. Section 1.401(m)-3(d)(4) regardless of which contribution type is the safe harbor contribution.  You'll then have a plan that purports to meet 401(k) and 401(m) safe harbor requirement but does not, which is a disqualification issue.

It's possible that I'm misunderstanding the facts, or that I understand the facts but those who replied previously did not.

On ‎4‎/‎16‎/‎2018 at 9:21 AM, MWeddell said:

No, this could easily disqualify your plan.  Don't do it.

It sounds like you are suggesting that elective deferrals can be made from bonuses but that any deferrals from bonuses be excluded from matching contribution computations.  However, all you'd need is one NHCE with a bonus that is higher as a percentage of his/her pay than the HCE receiving the lowest bonus among HCEs and you will have violated Treas. Reg. Section 1.401(k)-3(c)(4) if the match is the safe harbor contribution and Treas. Reg. Section 1.401(m)-3(d)(4) regardless of which contribution type is the safe harbor contribution.  You'll then have a plan that purports to meet 401(k) and 401(m) safe harbor requirement but does not, which is a disqualification issue.

It's possible that I'm misunderstanding the facts, or that I understand the facts but those who replied previously did not.

Don't know if I agree. 1.401(k)-3(c)(4) and (d)(4) just refer to 1.414(s)-1 compensation, which includes both the all-inclusive "safe harbor alternative" definitions of compensation and other definitions of compensation that pass 414(s), which the questioner says his does.

There is still the question of whether the plan document permits.

I’ll adhere to the position stated in my April 16 post, Luke.

Suppose NHCE has $90,000 of base pay and $10,000 bonus during a plan year.  HCE has $150,000 of base pay and $0 bonus.  There are other highly compensated employees of course who receive substantial bonuses, but I’m intentionally picking a worst case HCE when looking at Treas. Reg. 1.401(k)-3(c)(4).  They each defer 4% of base + bonus and the enhanced safe harbor match is 100% match on elective deferrals made from the first 4% of compensation, but for match (not elective deferral) purposes “compensation” is defined as base pay only.  Furthermore, base pay satisfies 414(s) testing.  The matching contribution is intended to be an enhanced 401(k) safe harbor match.

We still have a problem.  NHCE defers 4% x $100,000 = $4,000.  NHCE’s match is 4% x 100% x $90,000 = $3,600.  HCE defers 4% x $150,000 = $6,000.  HCE’s match also is $6,000.  If we consider “safe harbor compensation” in Treas. Reg. 1.401(k)-3(c)(4) to mean base pay, then both NHCE and HCE contributed 4% of base pay, so we can compare them.  The ratio of HCE’s matching contributions to elective deferrals is $6,000 / $6,000, which is greater than NHCE’s ratio of matching contributions to elective deferrals of $3,600 / $4,000.  We have a failure to meet the safe harbor requirements for a plan that states it is a 401(k) safe harbor plan, which is a qualification failure.

I’ll admit this is complicated, but after reconsidering it, I think I’d still very much want a client to avoid this situation.

MWeddell, I'm getting confused, but I think I still disagree. The requirement in Treas. reg. 1.401(k)-3(c)(4) is that,

"The safe harbor matching contribution requirement of this paragraph (c) is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation."

In your example, the HCE defers 4% of safe harbor comp and the ratio of his/her matching to elective deferrals is 1 to 1. In this plan, "any eligible NHCE" who deferred 4% of safe harbor compensation would also have a ratio of match to elective deferrals of 1 to 1.