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Money Purchase Pension Plan vs. Profit Sharing/Discretionary Contribution DC Plan for 457(b) Matching Contributions


Luke Bailey
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I have a governmental client that is switching vendors from one mutual fund company to another. It previously had a discretionary contribution DC plan (identified as profit sharing plan in the old adoption agreement) and is adding a 457(b) plan with the new vendor and will match employees' 457(b) elective deferrals in the revised 401(a) plan. The new vendor seems to think that in order to match 457(b) deferrals in the 401(a) plan, at least at a fixed rate, it is either required or advisable to change the 401(a) plan from a profit sharing plan to a money purchase. Has anyone seen this before and if so do you know the basis for it?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Elective deferrals under a § 457(b) plan with a matching contribution under a § 401(a) plan is a common design (if the governmental employer has sufficient authority under State law).

I have never seen it done as money-purchase plan.

Governmental Plans Answer Book suggests (at Q 6:26) that stating a plan as a money-purchase plan might impose a tax-law funding requirement to the extent needed for the plan’s benefit to be sufficiently determinable under 26 C.F.R. § 1.401-1(b).

But a governmental plan stated as a profit-sharing plan (with no § 401(k) arrangement) has no Internal Revenue Code funding requirement.

I’m unaware of a good reason for a governmental employer to self-impose any more funding requirement than State law commands.

Under Internal Revenue Code § 401(m)(4)(A)(ii), a matching contribution includes one made to any defined-contribution plan on account of an elective deferral, which under IRC § 401(m)(4)(B) “means any employer contribution described in section 402(g)(3).”

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thanks, Peter. Along the lines of what I was thinking. I thought perhaps this was one of the many bits of arcanaI had yet to come across, but apparently no.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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