Hi,

I am working on the testing for a plan. Stated in their plan document is a limit of 5% of deferrals for HCEs. Also, the HCE matching formula is stated as 0%. (NHCE 50% up to 6%) My problem is the plan sponsor is defining HCEs as employees whose base salary is greater than the limit. For example, if my base is $80,000 but my OT is $30,000 for a total of $110,000. I am not considered a HCE for purposes of the limit or the match--which means I can defer 10% and receive the match). I know their is some flexible in discriminating against HCEs, but since they are not following the terms of the plan would this be considered an operational/plan defect?

Unless the document somewhere says "for purposes of this section only a Highly Compensated Employee is defined as ..... base pay only" I agree that they are not following the terms of the plan. If the client is going in that direction, I'd suggest amending the plan to read "participants whose base pay exceeds...." rather then creating confusion by using a term that is defined differently in a different place. But this will only change the future limits/match. They will still have to fix the prior year(s).

BTW, this definition does not mean the plan will automatically pass the ADP test.

I agree with SheilaD. There's no problem with discriminating against HCEs (giving one something, but not the other). They have to follow the terms of the approved plan document though.

Thank you for the input. I will now go back to my client.