A client asked if the allowance or requirement to include overtime and/or bonuses in the definition of pension compensation was just based on the terms of the Plan or if it was a legal requirement.

I said that it depends on the terms of the Plan, but that it is common if not advised to use a definition that meets the statutory requirements for plan testing purposes. My understanding is that (under 414(s)) for testing such as 415, top heavy, etc. you are not allowed to include bonuses and overtime, but for plan purposes you can include overtime and bonuses.

Any thoughts?

Gary, I think you've got the testing part backwards.

You (the Plan) can exclude bonus and/or overtime under one of two conditions:

1. the ratio test of 414(s) passes (common for bonus' exclusion but not overtime); or
2. the plan is general tested and passes

But, the general test must use comp that satisfies 414(s), which means either gross pay or some definition less than gross that passes the 414(s) ratio test.

And, for top heavy purposes you must include bonus' and overtime.

AndyH,

Is the following correct?

In terms of pension compensation for benefit accrual purposes, it is based only on what the plan says. i.e. there are no laws that would override the pension compensation definition, as long as the Plan bases its testing on an acceptable definition of compensation?

In terms of testing it sounds like you can always include bonuses and o/t, but there are situations where you can exclude those forms of compensation.

So as far as I can see I need to review the 414(s) regs.

Do you agree?

Gary

Yes, I agree completely.