414(s) testing questions

I know if a plan fails the 414(s) test, we have to use compensation that satisfies the test.

Say that plan excludes bonuses and the 4149s) test is failing.

Instead of just including the bonus and move on, could I perhaps exclude HALF of the bonus if that would then pass the 414(s) test?

For example, only NHCEs get a bonus.  This year, they all got a 6% bonus.  test fails; difference is 6%.  Could I exclude only half the bonus, so now my difference is the widely-accepted 3%?

I think 1.414(s)-1(d)(2)(ii) permits excluding only a portion of the bonus. The question, I think, is whether your document gives you the discretion to arbitrarily choose the portion of the bonus that is excluded/included from year to year?

That's my next stop.

RTFD, BG510!

Our document permits the Employer to OPERATIONALLY elect to use any definition of 414(s) Compensation provided such definition satisfies the nondiscrimination requirements of 414(s) and the regulations thereunder. I'm just guessing that yours may be similar. Your approach is interesting, and seems valid to me - I've just never happened to see it used. But I may be missing a crucial point - I haven't looked into it in detail!

Have you had any conversations on what this plan's attorney is willing to call de minimis for 414(s) purposes? 

the IRS has never defined it.  I have had exactly one attorney sign off on a 7 percentage point spread in my time. 

That was aggressive in my mind.   

I'd be cautious

https://www.irs.gov/pub/irs-tege/epchd304.pdf

page 3-25

while it is 'reasonable' to exclude bonuses, there is nothing that says you could exclude only a portion of bonuses.

and later it goes on to say 'not reasonable' would be 50% of the 415 limit, so it could be in the govt eyes a % of bonus would not be reasonable either, especially now since you are intentionally doing it to 'pass the 3% de minimis rule' - creating a definition that seems to favor HCEs which is a violation of the rules.

but then I am a nut case, so take the comments with a grain of salt.

7 hours ago, ESOP Guy said:

Have you had any conversations on what this plan's attorney is willing to call de minimis for 414(s) purposes? 

the IRS has never defined it.  I have had exactly one attorney sign off on a 7 percentage point spread in my time. 

That was aggressive in my mind.   

We also have not heard or read anything on what is de-minimis for 414(s) purposes.  One attorney told us 5% was de-minimis.  We've done testing with 2% spread... and assumed that was de-minimis.

only NHCEs get a bonus

Did you mean HCEs?  don't think an NHCE bonus could cause a problem.

I would first try gross comp and see if whatever the plan does passes.  If so, done.  if not, get creative.

Earl, if the plan excludes bonuses from comp, and only non-HCEs get bonuses, it disproportionately harms non-HCEs. 

For what it's worth, I've always been under the impression of 1-2% rule of thumb. I think 5-7% is pretty aggressive. 

This is a Safe Harbor plan.  I need to base the SH contribution on something that satisfies 414(s).

FWIW, Relius uses 3% as the de minimis.