Is the use of total compensation required when calculating the safe harbor 401(k) nonelective contribution?
Rev. 02/09/07

The Internal Revenue Code does not mandate a compensation definition for this purpose. But IRS guidance states that the compensation to be used must satisfy the 414(s) definition of compensation. This guidance is satisfied by the 3401(a), 6041, 6051, and 415 definitions in our Basic Plan Document #01. Thus, any definition of "compensation" selected in our adoption agreement is satisfactory for calculating the safe harbor contribution.

In addition, 414(s) does not preclude modifications to the plan's definition of compensation (such as the elimination of bonuses, commissions, etc.), provided the revised definition passes the "compensation inclusion ratio test." (This is "Demo 9" on the plan determination submission package).

Also of interest is that a plan document is allowed to limit the eligible compensation to the period of plan participation. For example, if a plan has semi-annual entry dates and a participant entered the plan on July 1, the plan may be written to limit compensation for that participant to the period from July 1 to December 31 of the year the participant entered the plan.