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ER Match/BRF Issue


Laura Harrington
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401(k) plan has a match formula of 100% of salary deferral up to 2% of compensation; however, only those who defer at least 4% of compensation are eligible for the match.

There is a potenital BRF issue, but I'm not sure how to test for current availability.

Two possibilities come to mind:

1) Test based on the fact that everyone had the ability to defer at least 4% of their compensation. Therefore, the matching formula was available to everyone, even if they did not defer at least 4%.

2)Test based on the deferral percentages for each participant. Only those who deferred at least 4% were eligible for the match, so they are the only ones benefiting for the availability test.

Any thoughts or other ideas?

Thanks!

Laura

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I think #1), availability being the test.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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while true, anyone technically could defer 4%, so current availability seems to pass.

the more important issue is 'effective availability' and I believe that is what you are really asking.

there is no numerical test, but rather its based on facts and circumstances, but I think your option 2 is probably a reasonable approach. (and see 1.410(b)-4©(3) for other facts and circumstance items.

and before someone says

why bother, everyone has that option to defer 4%.

ok, what if the plan provided the match but only to those deferring 10%? (besides being guaranteed of failing the ADP/ACP test, almost no NHCE could take advantage of such a match.

consider also the safe harbor 401(k) rules. you can't have a match that increases the more one defers.

so its obvious, at least to this individual, that the IRS has some concerns as to whether a formula might be out of someone's effective availability.

The problem is that they have never told us just how much is reasonable.

that's my 2 cents worth. is that enough for the match?

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Tom, 2 cents enough for the match? Only if your annual pay is $2.00 or less!

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John and Tom, thank you for your replies.

Tom, while your 2 cents means something to me, I don't think it would mean anything to this particular employer!

My question was actually about testing for current availability and not effective availablity. I know the effective availablily is much more difficult to test for in this case and wasn't going there with my question. But since you mentioned it, I'll let you know what my rationale was in determining the match is effectively available.

I considered the ACP safe harbor rule which allows for a match on salary deferral of up to 6% of compensation. It was always explained to me that the reason for this cap was that the IRS did not think most NHCEs could afford to defer more than 6% of their compensation.

I also considered the QACA elevator rules which allow for automatic contributions of up to 10% of compensation. This must mean the IRS thinks at some level that NHCEs can afford to defer up to 10% of their compensation.

In this case, a NHCE only has to defer 4% to receive the maximum match, so I rationalize that the match could be considered to be effectively available.

Laura

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Tom -- I agree with you with regard to effective availability testing. But, I'm not so sure that current availability is met just because a participant could have deferred 4%. The condition of requiring a minimum contribution/deferral in order to receive another contribution (i.e., matching) is not listed as one of the conditions in the regs that can be disregarded--and that list appears to be an exclusive list (rather than a representative list). (Treas. Reg. Section 1.401(a)(4)-4(b)(2)(ii)(B).) So, I believe that those who receive the match would have to pass a minimum coverage test (IRS Section 410(b)) in order to pass current availability.

Because current availability is being determined without disregarding some eligibility requirement (such as age, service, etc.), I believe that the group of employees with regard to which the matching contribution is currently available is probably the same group of employees with respect to which the match is effectively available. This basically means that those who receive the match must pass some Section 410(b) test.

Laura -- I don't think current availability is based on the reasonableness of the condition which must be met in order to receive the matching contribution. We're not talking about whether the amount of the deferral is too high or not, but about what conditions must be met to receive the match. Here, there is the requirement of a 4% deferral to receive the match. While that may be a reasonable amount, and might be deemed non-discriminatory on its face, it may not pass Section 410(b) muster in this case (which I think it has to here). If the minimum deferral were 4%, perhaps that would be permissible based on the reasonableness of the deferral percentage as you discuss. But that's not what we have here. We have some people deferring 1%, some deferring 2%, and some deferring 3%, none of whom receive the match.

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In the 2007 ERISA Outline Book, Sal Tripodi gives an example of testing a tiered match formula for current availability. The formula is 50% on the 1st 2% deferred and 100% on the next 4% deferred. He states that all employees have the same opportunity to defer enough to receive the maximum match, so current availability is satisfied.

While this matching formula is not exactly like the one in the example, it is, I believe, a similar type of formula.

Laura

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Another thought:

If the matching formula were based on years of service, say 0-3 YOS: no match and 4+ YOS: 100% on the 1st 2% deferred, I would test for current availability by counting those with less than 4 YOS as not benefiting and those with 4+ as benefiting. Even if some of the 4+ group did not defer, and therefore did not receive the match, they would still be benefiting for current availability because the match was available to them if they had deferred. The fact that they did not defer would have no bearing on the test.

Should the fact that employees chose not to defer affect the test with one type of match formula and not another?

Just another rationale for using option #1.

Laura

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Laura:

Your comment about the QACA is interesting because the very question was raised at the ASPPA conference a few years ago, and the response was 'effective availability would be questioned'

I believe somewhere buried in the Nondiscrim section of Sal's book (chapter 9) it notes that 'utilization' is not considered as part of the current availability test, but low utilization would be considered for effective availability.

Must be nice to have one or two NHCE deferring to help pass ADP/ACP test - enough to offset the other NHCEs who do nothing

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This really challenges some issues that have never been anticipated by the IRS. My opinion is that some individuals intentionally seek to create instances where those areas are challenged. Look at it, what sane individual would recommend a matching formula that applies to only those individuals who contribute at a certain level. Better yet, to prescribe a formula of increasing the rate of matching contributions as the rate of deferrals increase.

Certain issues (Please excuse the semantics as I am attempting to articulate the problems)

In order to benefit for 401(m), you must be eligible to make after-tax contributions or receive a matching contribution (in the event you defer). Now, everyone will be considered 'benefiting' for ACP as they will be eligible for receiving a matching contribution if they defer at least 4%. However, would it not be fair to say that anyone who defers, but fails to receive a matching contribution is not benefiting for ACP (assuming no after-tax provision)?

I think all would be considered benefiting under this example (even though the employees who deferred less than 4% failed to receive a matching contribution). I say this because they would have been "eligible" to receive a match had they deferred at the rate necessary in order to receive the match.

Now, let's take it a step further into the realm of BRF.

If we say that benefits, rights & features must be currently available and effectively available on a nondiscriminatory basis, the the current availability test passes since the formula is available to everyone under the terms of the plan. Everyone is eligible. But for effective availability, wouldn't it be appropriate to measure each individual (and determine the rate of match received at the overall rate of deferral). For instance, if HCE 1 deferred 10% of salary while receiving a matching contribution of 2%, then his rate of match is 20% of deferrals. If HCE 2 deferred 5% of salary and received 2% matching, then his rate of match is 40% of deferrals. Notice, the actual rate of match goes down at the higher rate of deferrals. The problem (for effective availability purposes) is that the NHCE who defers 3% of salary and didn't receive a match. His rate is 0% of deferrals.

This is how I would test the provision. And then, I would run my ACP test with everyone included.

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ERISAnut,

Would not your method of measuring match against deferral to arrive at a benefiting percentage always yield the phenomena you describe if there's a cap on the matching, regardless of the twist that Laura posed (i.e., only get the match if your deferrals reach a certain level)? That portion of what you describe as

For instance, if HCE 1 deferred 10% of salary while receiving a matching contribution of 2%, then his rate of match is 20% of deferrals. If HCE 2 deferred 5% of salary and received 2% matching, then his rate of match is 40% of deferrals. Notice, the actual rate of match goes down at the higher rate of deferrals.
would describe a plan that has a cap on match at 2%, regardless of the 4% deferral threshold that Laura posited.

I would think that the varying ratios you observed there are not a problem. The match capped at 2% is one BRF, and the ability to make elective deferrals to whatever percent is another. I'm not aware of what requirement would tie them in a way that results in a ratio for testing comparison.

I think your observation,

The problem (for effective availability purposes) is that the NHCE who defers 3% of salary and didn't receive a match. His rate is 0% of deferrals.
, captures the essence of Laura's question. So for minimum coverage, would you include this NHCE in the test as benefiting or not?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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J Simmons,

I understand what you are getting at. Let me state it a little differently to address your question.

For minimum coverage, I would state that the NHCE is benefiting because (at least as some point during the year) he has a opportunity to defer and receive a matching contribution for that deferral. I would say this because the opportunity to defer at 4% is there and is the only requirement for receiving a match. Hence, deferring at 3% would be the equivalent of not deferring when it comes to a match allocation. You still benefit.

BUT, what does that do to BRF. It puts a strain on it. Contrary to your statement at a matching contribution capped at 2% is a BRF, I think EACH RATE OF MATCH is a BRF. The issue is defining "RATE OF MATCH". It is simple, dollars of matching contributions divided by dollars of deferrals. It is this rate that becomes effectively discriminatory when a huge number of employees 1) Defer into the plan and 2) Defer at less than 4%.

This has the potential of failing both ACP and the effective availability of a nondiscriminatory rate of match.

Notice that this issue taps into an area that has never been anticipated by the IRS; however, is not impermissible as long as tested correctly. This issue comes down to agreeing on a definition of 'RATE OF MATCH'. If an agreement is made that regardless of compensation, the rate of match is calculated as match/deferrals; then the effective rate made available over the entire class of employees can be calculated and tested, which can become an important fact within a facts and circumstances tests. Look at it, if everyone defers at 4%, then it's not a problem. If no NHCE defers, then ACP fails. If all NHCEs defer, but defer at only 3%, then all "HELL" breaks loose. You fail ACP and BRF.

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Why, ERISAnut, isn't the rate of match the 100% or the 50% or 0% as compared to the compensation deferred (without considering the cap)? Otherwise, you have an infinite number of rates of match if you're comparing match % to deferral %. The reg specifically defines rate of match: it's "treating different rates as existing if they are based on definitions of compensation or other requirements or formulas that are not substantially the same" (Treas. Reg. Section 1.401(a)(4)-4(e)(3)(iii)(G)). So, if the match is based on a % of compensation formula--as Laura's is, some at 0% of compensation and some at 100% of compensation--you already have your rates of match for purposes of effective availability testing. On what basis are you redefining a rate of match for purposes of 401(a)(4) testing?

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Sieve,

I see your point and would enhance my formula to state that I would consider only deferrals that do not exceed 4% of salary. In my haste, I did not account for the possibility of someone deferring 10% while only receiving a 2% match. So, for effective availability, you would have a combination of 50% (for anyone deferring at or above 4%) and 0% (for any who defers, but at a rate below 4%) distributed over HCE and NHCE. The issue would arise if a large number of NHCEs defer below 4%. It would not get helped if an NHCE defers at 10% (as I improperly concluded above).

So, the current availability will pass but the effect of that availability will be diminished by NHCEs deferring, but at rates below 4%.

This would encompass all the rules to effectively address Coverage, ACP, and BRF.

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Now that we've circled the wagons once or twice, I'd like to go back to current availability just one more time. Bear with me for a minute or 2 . . .

Laura, aside from the fact that your formula is very much like the one Tripodi says meets current availability, try this one: anyone at Division A gets no match, anyone at Division B gets a 50% match. That one's easy, like your year of service example: only those in Division B are considered benefiting for purposes of current availability, because where they work is an eligibility condition of the match and it is a condition over which they really have no control (like the number of years of service they have with the employer). In other words, the condition is taken into account in determining who is benefiting, and therefore only some of the employees are treated as benefiting for current availability purposes. I get that.

Now, how about this one: anyone who lives in the suburbs gets a 0% match, and anyone who lives in the city gets a 50% match. Is this somehow different than my Division A & B example?--i.e., are all employees considered to be benefiting, just because any employee has the ability to chose to live in the city and therefore receive the 50% match? In other words, the voluntary choice they make has no impact on who is considered to benefit since they all had the opportunity to choose otherwise? That, to me, is like your match example: there is a condition on receving the match--making a deferral of at least 4%--but, since anyone has the opportunity to choose to make a deferral of 4%, EVERYONE is considered to be benefiting. If this city/suburb example is a condition of receving the match that results in only the city dwellers considered as benefitting, then only those who defer at least 4% should be considered benefiting in your original fact pattern--i.e., your selection #2.

I'll agree to defer to Sal's conclusion and the concensus of the other posters, and give up the ghost on this one, but I just don't get. If there is an eligibility condition to receiving the match, why isn't that condition always taken into account when determining who benefits, even if the employee could have chosen differently? See the general rule for BRF eligibility conditions in Treas. Reg. Section 1.401(a)(4)-4(b)(2)(i) and the list of conditions in Reg. Section -4(b)(2)(ii)(B) that can be ignored.

I'm not trying to be obstreperous (I actually looked up the spelling of that one!). I'm just trying to understand and get my hands around the concept. Can anyone help me a bit more, or am I just hopeless?

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Hi, Larry,

It seems to me that your approach to current availability blurs that concept with the other BRF requirement, i.e. effective availability.

As I understand it, the current availability component requires that among all eligible EEs each BRF must pass the ratio percentage test, treating as benefiting only those EEs to whom the BRF is currently available. Current availability is "determined based on the current facts and circumstances with respect to the employee (e.g., current compensation, accrued benefit, position, or net worth)", disregarding certain spelled-out conditions. Treas Reg § 1.401(a)(4)-4(b)(2).

From looking at the current facts and circumstances, what is to be determined? Current availability. Keep in mind, the other requirement (effective availability, Treas Reg § 1.401(a)(4)-4©(1)) means the BRF "must not substantially favor HCEs". Thus, what is the role being played by current availability? What interpretation of current availability would not merely make it a redundant subset of effective availability? In reference to Sal Tripodi, Laura used the term 'opportunity' in describing current availability.

I would re-phrase current availability as current, practical opportunity. I use the qualifier 'practical' because it gives substance to the part of the regulation that provides that current availability is to be determined from the current facts and circumstances. Since each EE has the current, practical opportunity to make 401k elective deferrals of at least 4%, each EE has the current, practical opportunity to the 2% match. Among those that must be taken into consideration, the ratio percentage test must be passed by those who have a current, practical opportunity.

I agree with Laura that if the condition (deferring a certain percentage of pay into the plan) is set too high, then certain employees would not have a practical opportunity to get the match. For the reasons Laura expressed in post #9 of this thread, I do not think 4% is so high that it removes the opportunity.

Keep in mind, if those that have and exercise that opportunity (for whom it is currently available) are disproportionately HCEs, the effective availability component will fail.

I don't know if this explanation helps. I have an easier time understanding my own thinking on this topic when it is expressed as it is in post #2 of this thread than when I've given it the wind-bag version of this post.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John --

You certainly are correct that I am blurring these concepts (current & effective availability), and I appreciate your willingness to lead me through them--they are much less blurry now. Your explanation has, in fact, done more to clear things up than your Post #2 did -- :lol: --as has a re-reading of the -4(b)(1) reg: I was thinking that current availability was determined based on who was benefiting, when, in fact, it's the other way around (when you perform the necessary 410(b) testing for current availability). And, the -4(b)(2) reg now makes more sense when, for example, I view "current compensation" as an individual employee facts and circumstances issue which impacts the current availability of a certain size match with respect to that employee. (I'm still not absolutely certain how the conditions regarding availability factor in, though.)

Thanks. There is hope for me yet . . . :rolleyes:

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Hi, Larry,

Current availability is more of an on-its-face, appearance test, while effective availability more an impact-in-operation test.

Now for my analogy, I look at current availability as whether the gate is open wide enough that if they choose, at least 70% of NHCEs could as a practical matter walk through the gate if 100% of HCEs may.

In determining whether the gate is swung open wide enough, you look at the current facts and circumstances, but you can ignore that there are certain impediments in the pathway, as listed in Treas Reg § 1.401(a)(4)-4(b)(2). Other impediments in the pathway must be considered as part of the facts and circumstances in determining if the gate is open wide enough.

If the gate is open wide enough, effective availability provides a fail safe. We now look at those that actually do walk through the open gate in order to make sure that HCEs are not pretty much the only ones going through. If it is a disproportionate number of HCEs, then there must be some practical impediment in what otherwise appears to be an open pathway, which substantially favors the HCEs.

Just because someone did not walk through the gate (e.g., an NHCE that did not defer 4%) does not mean that it was, under the facts and circumstances (sans the conditions to be disregarded) that the NHCE did not have a practical opportunity to do so. 4% deferrals is a condition for the 2% match, and is not one of the specified conditions to be disregarded. Therefore, the 4% deferrals condition must be taken into consideration. 4% as the threshold for deferrals to get the 2% match is, in my opinion as buttressed by those factors that Laura has mentioned, low enough to make the 2% match a practical opportunity open to all employees.

If the disproportion of HCEs that receive the 2% match (BRF), given the 4% deferrals condition, is such that it 'substantially favors' the HCEs, then the 2% match would be a BRF that fails the effective availability test.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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OK. So the conditions are just taken into account in the anaylsis of current availability, not as a limiting factor to determine to whom the BRF is currently avilable. Got it (I think). Your analogy was very helpful.

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Thank you everyone for your replies.

It sounds like I need to think outside of the box more regarding effective availability.

For this particular plan, the good news is that for 2007, only 1 of the 3 HCEs deferred and he only deferred 3% of his pay. No current availability or effective availability issues for 2007.

But for future years it is possible all or some of the HCEs may defer 4% or more, in which case the number of HCEs/NHCEs who defer enough to receive the match will become one of the factors I will consider for effective availabilty.

Here is another situation:

Plan is calendar year, 1/1/2007-12/31/2007, and allows for discretionary match on a payroll-by-payroll basis. The employer does not begin making the discretionary match per payroll until 7/1/2007.

For current availability I treat the participants who terminated prior to 7/1/2007 as not benefiting since they did not have an opportunity to receive the match.

Typically for effective availability I would consider whether or not the employer communicated to the plan participants that they were going to begin making a match mid-year and whether or not they gave them an opportunity to change their deferral elections. But are there any other issues I need to consider for effective availability?

Laura

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Laura,

Stepping back for a moment, is the reason for the potential BRF issue because the matching scheme does not pass ACP testing?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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J Simmons,

I understand what you are getting at. Let me state it a little differently to address your question.

For minimum coverage, I would state that the NHCE is benefiting because (at least as some point during the year) he has a opportunity to defer and receive a matching contribution for that deferral. I would say this because the opportunity to defer at 4% is there and is the only requirement for receiving a match. Hence, deferring at 3% would be the equivalent of not deferring when it comes to a match allocation. You still benefit.

BUT, what does that do to BRF. It puts a strain on it. Contrary to your statement at a matching contribution capped at 2% is a BRF, I think EACH RATE OF MATCH is a BRF. The issue is defining "RATE OF MATCH". It is simple, dollars of matching contributions divided by dollars of deferrals. It is this rate that becomes effectively discriminatory when a huge number of employees 1) Defer into the plan and 2) Defer at less than 4%.

This has the potential of failing both ACP and the effective availability of a nondiscriminatory rate of match.

Notice that this issue taps into an area that has never been anticipated by the IRS; however, is not impermissible as long as tested correctly. This issue comes down to agreeing on a definition of 'RATE OF MATCH'. If an agreement is made that regardless of compensation, the rate of match is calculated as match/deferrals; then the effective rate made available over the entire class of employees can be calculated and tested, which can become an important fact within a facts and circumstances tests. Look at it, if everyone defers at 4%, then it's not a problem. If no NHCE defers, then ACP fails. If all NHCEs defer, but defer at only 3%, then all "HELL" breaks loose. You fail ACP and BRF.

ERISAnut,

I agree that it boils down to defining 'rate of match'. Do you have a cite to any authority for rate of match being match/deferrals rather than 0% for those deferring less 4%-of-pay, 50% for deferring 4%-of-pay, and 0% again for deferrals in excess of 4%-of-pay? If not, what is your logical deduction from any regulation or pronouncement for the match/deferrals as the definition of 'rate of match'? Thank you.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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