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ER Match/BRF Issue


Laura Harrington
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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.

No, but I think it is at all rates. Where I was corrected by Sieve was that one participant can be considered to have several rates (but one highest rate). This highest rate is always the one in question.

For instance, my statement that if someone defers a 10% and receives a 2% match, then his rate of match is 20%. However, that same individual had 'effectively' received that same 2% match at the point he deferred 4%. Under this scenario, his rate of match is 50%. Since 50% is the highest rate, then this is the one that creates an issue; because anyone benefiting at 50% automatically benefits at 20%. So, it is actually at each rate, but once you identify the HIGHEST rate, this should be what is tested.

Stated differently, we could not argue in good faith (as I did) that this individual could be tested at 20% (because he deferred at 10%) when in fact his rate was at 50% (at the time he deferred at 4%).

This may actually be a good question for the IRS at the ASPPA convention in October; "Define in exact terms what is meant by 'Rate of Match'.

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Hey, Larry,

I was fishing in hopes ERISAnut knew of some authority that perhaps gave clarification, particularly through examples.

Yes, Treas Reg § 1.401(a)(4)-4(e)(3)(iii)(G) provides that different rates exist if based on formulas that are not substantially the same. That does cut against the match/deferrals ratios being BRF tested. But what is a formula? and what would make two or more of them substantially the same?

Laura's phraseology in Post #1 suggests she thought (at least subconsciously) there was but a single formula: "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." Laura's description of Sal's example from the 2007 ERISA Outline Book "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." I mention this not that I think it is Laura's position that there is necessarily only 1 formula in either situation, but merely to point up the vagueness in the regulation's use of the term formula without defining it.

Perhaps Laura's fact patter can be deconstructed into being two formulas: 0% match on deferrals up to but not quite 4%-of-pay, and 50% on 4%-of-pay.

Or a third formula can be found, 0% on deferrals to the extent that they exceed.

ERISAnut's comments in Post #11 have made me examine my own assumptions on what is a formula and when would two or more not be substantially the same. Knowing the answers is necessary to knowing when you have more than one 'rate of match' that must be BRF tested.

So now I'll try fishing in another pond: do you know of parts of the regs or other authority where the IRS defined the difference between one formula and two and when two might not be substantially the same?

Thanks.

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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  • 2 weeks later...

Eureka!! Something about this entire issue has been bothering me like a piece of straw in my sock (that's a concept!!), but I think I've now found what was sitting in a far corner of my muddled brain. Here's another approach to the match testing that we've been discussing on this thread (which has been dormant for over a week). Let me know if anyone thinks this works. It sure is simpler (I think--or not!) . . .

Let's restructure this plan (as Laura originally described it) into 2 component plans under Treas. Reg. Section 1.401(a)(4)-9: one component plan has a 0% match and is made up of only those employees who receive no match, and the other component is comprised only of those who receive a 2% match. A restructuring can be based on a BRF (Treas. Reg. Section 1.401(a)(4)-9©(1) and -9©(2)). According to the regs, if the entire plan passes 410(b), then the plan will be deemed to pass 401(a)(4) if each component passes both 401(a)(4) and 410(b). (Treas. Reg. Section 1.401(a)(4)-9©(4) and -9©(5).) Basically, the only testing you really need to be concerned about for the restructured component plans is 410(b), and that's straight forward and certain--as opposed to fluffy, like effective availability testing.

It appears that effective availability and current availability testing are out of the picture when restructuring and testing the separate component plans. And it seems that the different matching levels will pass muster if each passes 410(b). Simple testing. I'd start here with restructuring, rather than mess with effective availability.

Am I missing something? Thoughts?

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I for one certainly appreciate a concrete 'straight forward and certain' test over fluffy.

Would you ACP test separately or as a whole?

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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