Compensation Can Confuse Safe Harbor Plan Nondiscrimination Testing

In a report published in the Journal of Pension Planning & Compliance, Daniel Schwallie, an attorney with Aon Hewitt’s Retirement Legal Consulting & Compliance practice, notes that ADP and ACP safe harbor plans require that a nondiscriminatory definition of compensation be used to determine safe harbor matching contributions.

However, he says, “the plethora of permitted compensation definitions, and the rules surrounding them, can create compliance issues, particularly if the plan document, payroll, and recordkeeping are not properly coordinated.”

The report serves as a guide for the different definitions of compensation that may be used and what happens when the wrong definition is used to determine safe harbor match contributions.

Schwallie concluded that plan sponsors, plan advisers, payroll administrators and recordkeepers should work together to ensure all parties understand how the plan is supposed to work, and to ensure administration of the plan matches that understanding, in compliance with ADP and ACP safe harbor plan requirements.