The software that we use to complete rate-group testing allows us to pro-rate a mid-year entrant's full year compensation to determine their post-entry compensation to use in the nondiscrimination testing.

Personally, I am not comfortable with this and want my employees to determine (and if necessary, request from the client) actual compensation from date of entry through the end of the year. Apparently we have been using this feature for many years and there is a general belief that since the testing software allows it, it must be legal.

Does any one have any thoughts, comments or even references as to the legality of simply pro-rating the full-year compensation to determine post-entry compensation versus determining actual post-entry compensation?

I have a thought: what cite allows you to do it specifically? I know of none, so I would only use actual compensation from date of entry. I can only imagine the software allows you to do it as a means of estimating the results.

What does plan define comp as? If the Plan says amount received for services renderd after date of entry you have an issue to address. Prorating might work for estimate, but for acutal testing you will have to have the actual comp from date of entry.

Compensation for general nondiscrimination testing is not defined in the plan document.

I know that my method (i.e. actual compensation paid after date of entry) is the correct method, it is just sometimes difficult to convince others who have been doing it another way for many many years.

I have tried Blinky's argument....show me where it says it can be done...but that is where the "well it must be allowed since the software company put it there" argument came into play.

Perhaps I will contact the company and ask them to explain why they included that option. As both Blinky and Janet have stated, it may be there just for estimation purposes.

Ask the software company what is their intension in providing that option.

The acceptable definitions of comp for testing purposes are outlined in 1.401(a)(4), and estimated or prorated comp ain't one of them regardless of what the software allows.

What Andy said.

The idea of asking the software company is that if they say "to make estimates easy" her co-workers would not have an answer. It was not because they are regulatory authorities.