(b)lines Ask the Experts – When Nondiscriminatory Compensation Under 414(s) Applies

“A Section 414(e)(e) religious organization, that does not meet the definition of church or qualified church-controlled organization QCCO under Section 3121(w)(3)(A) and (B), and elects not to be covered by the Employee Retirement Income Security Act (ERISA), sponsors a 403(b) plan with employer matching contributions.

“I understand for contributions not made by salary deferral, the nondiscrimination rules of 401(a)(4) and (5), 410(b) (with the use of pre-ERISA rules under 401(a)(3) used to satisfy this test), compensation limit of 401(a)(17), and average contribution percentage (ACP) test for matching contributions would apply.  But would the plan need to provide that its definition of compensation is nondiscriminatory under 414(s)?”                                                       

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer: 

Yes, the non-QCCO church plan nondiscrimination testing rules that you state do indeed apply and you can add a nondiscriminatory definition of compensation to that list. For the unfamiliar, a 403(b) plan must use a compensation definition that satisfies 414(s) if for the following purposes:

1)      Determining a participant’s actual contribution ratio for the ACP test for matching contributions;

2)      Determining whether contributions or benefits are discriminatory under 401(a)(4); and

3)      Determining whether the plan satisfies a design-based safe-harbor (e.g. the same percentage of pay is provided to each employee as a base employer contribution).

There are some definitions that automatically satisfy 414(s), such as the various definitions of section 415 compensation. If the plan definition of compensation does NOT automatically satisfy 414(s) it must be a definition that does not favor highly compensated employees by design, is reasonable and satisfies the compensation “ratio” test of Section 1.414(s)- 1(d)(3). If the definition is discriminatory, the consequence is that it CANNOT be used for the tests described above; instead, a safe-harbor definition such as section 415 compensation MUST be used in the testing.

All of this is applicable to non-QCCO plans. For more information on the tests that apply to non-QCCOs; please see our prior Ask the Experts column about the subject.


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.