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Differing match and ps in plan without HCEs and Keys


ldr
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Good afternoon to all,

We are setting up a new plan for a controlled group of 5 companies that will probably have 2,000 participants when it's all done.  By design, HCEs and Keys are excluded from participating.  There will never be a test failure such as ADP, ACP, 410(b), Top Heavy.  That's not the issue.

The issue is that the owner (one man owns all of it) wants to pick and choose select groups or individuals to whom he will give a discretionary match and/or a discretionary profit sharing contribution according to his pleasure.  His idea is that since there are no applicable tests to fail, why not?

We feel uneasy about this but can't find anything to hang our hat on.  Is this really permissible?

Thanks for your thoughts on this.

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With respect to profit sharing set up everyone in their own group you shouldn't have any issues.

The match I'm not sure. I honestly don't know if you can set up a truly discretionary match were you pick and choose what match you give by individual. I'm not sure why I feel the match might be an issue while the profit sharing isn't but for some reason I can't put my finger on it just doesn't feel definitly determinable. Maybe someone has some more insight on it.

 

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In general, a plan sponsor should be able to vary contributions as if they had amended the plan to state what they want to do, without actually amending the plan.  But the plan sponsor can't do what is otherwise prohibited.  For example, the plan sponsor might feel that only those with service greater than 3 years should share in a given year's contributions.  Even if it passes all the discrimination tests because the only participants are NHCE's, the IRS will disqualify the plan.

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I once heard it put this way once and it has stuck with me:

IRC 401(a)(4) says a plan may not discriminate in favor of highly compensated employees. It says nothing about discriminating in favor of non-highly compensated employees.  You can discriminate in favor of non-highly compensated employees all you like.

If the plan is using a Cycle 3 pre-approved document, they will have to provide a notice describing their discretionary match formulas and what formulas apply to which groups of employees.

As Mike said, they should make sure that they are not including a disguised age or service condition that would disqualify the plan.

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You need to make sure that the selections do not take into account bonus negotiations and preferences of employees as to cash bonus vs. matching contribution, otherwise you would have a "cash or deferred" arrangement that would disqualify the plan.

Also, make sure that what you describe is clearly provided for in the plan document. If it is a preapproved document, then as long as you stay within its provisions you have the safety of its opinion letter. If it is individually designed, then you need a DL for your totally discretionary match, which is an unusual provision.

Of course, to the extent you are not bucking up against the 415(c) limit with the nonelective, the same contribution that the owner wants to call a match could just be added to that individual's nonelective.

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Also, I would think that the plan sponsor would still need to make sure that its contributions are not discriminatory in the non-tax code sense of the word, such as discrimination on the basis of protected status. Age, marital status, race, so many other categories under both state and federal law would need to be taken into account. What a set up for disaster. 

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