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WP2017

403b match - age discrimination or not?

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Hello!  I work for a private university.  Our 403b match is different based on age.  If you are under the age of 35 and have worked less than a certain number of years you are eligible for 4% (once you complete a certain number of years you're eligible for the full match).  If you are over the age of 35 you are automatically eligible for 8%.

Is it legal to create that type of rule?  Seems like it favors employees over the age of 35 - who more than likely are also making more money than the younger employees.

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Wish I knew the answer from a plan design standpoint but it seems like it might also lead to unintentional disparate impact in hiring if it keeps the university from hiring someone over 35 based on the cost of the match and the age different match, such that hiring someone younger would be less expensive overall.

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When it comes to age discrimination, people who are over age 40 cannot be discriminated against, but there's no reverse discrimination law.  So from an ADEA (Age Discrimination in Employment Act) perspective, there is no violation.

That said, your plan will have to do a test, called the ACP (Average Contribution Percentage) test that compares the average match rate for HCEs (Highly Compensated Employees) to NHCEs (Non-HCEs).  As you point out, the older employees are likely to be higher paid, so this match structure could create a problem for the test.  BTW, an HCE is someone who makes more than $120,000 in a year. 

If the plan fails the ACP test, however, the usual result is a distribution or forfeiture of match to the HCE.  Typically the HCE may lose the tax benefit of the match, but not necessarily the money.

There is also another test, of benefits, rights and features, or BRF testing.  Here you have to show that the availability of the match isn't discriminatory in favor of HCEs.  I presume your plan's TPA does this calculation and that it passes.

In short, while it doesn't seem fair, it also isn't necessarily illegal.

 

Edited by kcbirm
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