A 401(k) plan limits elective deferrals to 15% of compensation. Compensation does not include commissions. After the end of the year, due to the fact that the non-highly compensated employees were payed large commissions, the amount of compensation for the HCE's that can be considered to get a passing eligible compensation ratio is lowered, which increases the deferral percentage. The NHCE's are deferring at a good rate so there is no real inpact on the ADP test. However, the percentage for the HCE's is now over 15%.

Can this be corrected with a distribution?

I may not be seeing the whole picture, but isn't the issue that the definition of compensation may be discriminatory?

That's why they are only using as much of HCE's compensation that will have same compensation ratio for the NHCE's.

Does the document allow the change in the HCE's definition of compensation?

How much the HCE's get in regular pay, bonuses, and commissions is determined at the end of the year.

Then what is the basis for the deferrals made during the year?

The deferrals are based on regular compensation, but it appears that the compensation is adjusted at the end of the year.

Adjusted as in reclassifying an "includable" form of compensation as a "nonincludable" form?

Yes, but only for the HCE's. This does not take anything away from the NHCE's and only limits the compensation for the HCE's. The HCE's decide what their pay should be before the end of the year, to avoid a discriminitory definition of compensation.

I hope the IRS isn't reading this.......

I will now retreat to the safe position of recommending that you seek competent legal counsel.

ok, thanks for your input

I'll be a little more blunt than WDIK. What you are doing is wrong. The HCE's cannot arbitrarily "reclassify" their compensation to make it excludable. Run, do not walk, to an ERISA attorney.

OK, Thanks