Compensation Definition for 401(k) Deferrals

If a deferral only plan wants to use a non-safe harbor definition of compensation for deferral purposes such as excluding commissions I believe there is no discrimination issues if the plan passes ADP testing using a definition of compensation that satisfies 414(s).  The question is ... are there any restrictions in the Code or regs (cites appreciated) for how compensation may be defined for deferral purposes - with regard to reasonableness or nondiscrimination and so forth?  Thanks.

If your compensation definition for allocation purposes is not a safe-harbor definition, you have to show that the definition itself is non-discriminatory under 414(s). That is separate from the ADP test, which is the exclusive test to show non-discrimination in amount of benefits in 401(k) arrangement.

I think what PensionPro is asking, if I may, is that while excluding bonuses may not pass 414(s), the Plan could still exclude bonuses from the compensation in which a deferral can be made, as long as the bonuses were added back to compensation for ADP testing.  Testing compensation has to satisfy 414(s), but the compensation from which a deferral can be made in a non-safe harbor plan has to be "reasonable".  

So the question is, I think, what is considered reasonable?  Or, maybe to put it better, what would be "unreasonable"?

On 1/22/2021 at 6:09 PM, Gilmore said:

Testing compensation has to satisfy 414(s), but the compensation from which a deferral can be made in a non-safe harbor plan has to be "reasonable".  

Okay, so allow me to answer in the following way: 414(s) compensation includes the four safe harbor 415(c) definitions of compensation, the three or four alternative safe harbor definitions under 414(s) and "any reasonable definition of compensation." There is a test under 414(s) for determining whether a compensation definition is reasonable. As I recall, one prong of that test includes what is called the "compensation test," which has to be calculated. I hope this clarifies. 

I am not aware of any "reasonableness" requirement on the definition of compensation for deferral election (not testing) purposes. The plan can generally place a maximum limit on the amount of compensation that can be deferred so I don't see any issue with carving out certain pieces of compensation for deferral election purposes.

However, see 1.401(k)-1(a)(4)(iv)(B) for rules regarding nondiscriminatory availability of benefits, rights and features that can be an issue when using an alternative definition of compensation.

There have been informal comments by the IRS at industry conferences essentially saying, in the context of discussing BRFs of the available rates of elective deferrals, that there is no test on the definition of compensation used for elective deferrals.  Just make sure the ADP test uses a 414(s) definition of compensation and that highly compensated employees are determined using a 414(q) definition of compensation.