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I agree with Luke - it needs to be tested under both. The contributions are conditioned on employee deferrals, so it is a match and needs to satisfy the ACP test. Each rate of match needs to be tested for nondiscriminatory availability of benefits, rights and features under 401(a)(4). It does not need to satisfy the general test for nondiscrimination, a.k.a. rate group test, which might be what you're thinking of as 401(a)(4), and is used to test nonelective employer contributions that do not satisfy a design-based safe harbor.

This is one of those issues that comes up periodically and I never think I have a full grasp on it--likely because I don't but also in part because I've never found what I thought to be a clear, authoritative, and fulsome discussion of the issues. Can you help? Situation this time involves a true Mom and Pop employer with husband and wife owners (both highly compensated) and a handful of other employees--3 or 4 full-time working more than 30 hours a week and a couple part-time working 15-20 hours per week. The company offers a fully-insured group health plan for full-time employees. Of those, only the owners and a couple of the full-time employees have elected to participate. The company has always "covered" 100% of the owners' group health premiums but historically only 60% of the others' premiums with the employees required to contribute the remaining 40%. Mom and Pop seem confused about the existence of an actual cafeteria plan but it appears they have been deducting the 40% of employees' premiums from pay on a pre-tax basis so seems they likely have a POP whether they realize or not. (Our understanding is the company has just paid 100% of the total premiums over to the insurer, including 100% of the premiums on behalf of the owners, plus the combined 60/40 contributions for employees without considering the premiums paid on behalf of the owners to be salary to them or a deferral from their pay in some way. In other words, it's just been employer-paid fully insured group health insurance coverage. As I understand the current rules, it does not seem like there is a per se problem with charging varying rates for the fully insured coverage from a group health insurance, HIPAA, ERISA, or other perspective. (The 60% contribution satisfies the 50% minimum employer contribution amount required by the insurer / underwriting so insurer is fine with arrangement.) Cafeteria Plan discrimination testing would appear to be a potential issue here, however. Even though they presumably only have a POP, my understanding is POPs are still subject to Section 125's "Eligibility Test" as part of the streamlined safe harbor testing. And based on some less than clear 125 examples and discussion in EBIA, the Eligibility Test arguably includes something of a "benefits" component that could be construed to prohibit an employer paying a greater percentage of benefits for HCs than NHCs. So that's potentially an issue here. However, in this situation, the HCs are not actually participating in the Section 125 plan--because the company is paying their full cost and they have no need of the 125 Plan. In essence, the NHCs are arguably getting more benefit from the Section 125 plan than the HCs because the NHCs are actually getting a benefit. I'm not wild about that argument for obvious reasons. However, what if we took this one step further and actually amended the Section 125 Plan to exclude all HCs from participation. There's no practical impact on the owners (the only HCs now and likely forever) because they are not participating in the Section 125 Plan. Under that approach, it seems impossible for the Section 125 plan to have a discrimination issue since no HCs could participate? But it also seems the company should still be able to pay 100% of the owners' premiums for the fully insured health coverage and not treat that as taxable compensation. I understand that could all change if and when the new Section 105(h) rules are extended to fully-insured group health coverage but, in the interim, are there nondiscrimination or tax issues with this sort of approach to having the company pay 100% of HCs' premiums and a significantly lower percentage of NHCs' premiums? Thank you.

Not in my practice! Just the annual problem (and COST) of valuing the stock each year would be prohibitive in most situations. And I think they have to be very careful with how the stock gets in the plan to avoid prohibited transaction issues. If the client insisted, they would be doing it with a different firm; we just don't need the headache that goes along with this. You may feel differently and that is just fine with me.

Being picky - but not really as this might be significant - your "allocation method" is still groups or whatever the plan doc says it is. Your desired "allocation" just happens to be what an integrated formula would give you. That should then pass general testing on a contributions basis, imputing permitted disparity. But with, I believe, still some possibility of failure (channeling MP with the cryptic comment). You might know this but some innocent lurking may not.

What does the document say? If not addressed what do the Administrative Policies say? If not addressed in Administrative Policies, now would be a good time to set and document them for now and the future. If you do allow election, it would be good to also have default order if election is not received timely enough to meet IRS deadlines.

Probably not a material concern but one thing to factor in if this is just a desire to terminate and pay out the amounts in the normal course rather than in connection with a dissolution of the company or some other significant corporate event (e.g., Austin's scenario A vs. scenario B) is the decision to terminate this 457(f) plan arguably could impact the entity's ability to safely maintain future 457(f) plans. A lot of the SRF issues with 457(f) plans historically seem to include IRS skepticism that tax-exempt really would subject amounts to forfeiture if the vesting requirements aren't fully satisfied. I can see that if the entity has a history of still paying out 457(f) amounts as severance or in some other fashion even though participants failed to satisfy vesting. That sort of skepticism seems out of place though if the organization is shutting down. On the other hand, if the entity just decides to terminate and accelerate vesting without some transformative reason (perhaps under the guidance of the executive who participates in the 457), I'd be concerned the IRS could question the SRF in future plans. Seems like a stretch (particularly if just happens once) and I've never seen it come up but the IRS doesn't need much encouragement to look askance at these arrangements. If there are independent business reasons for the termination, I'd certainly be sure to set them out in the board action.

Salary deferrals in a 401(a) plan can be provided only pursuant to Internal Revenue Code section 401(k), and governmental entities are not permitted to have 401(k) plans unless they had one back in 1986. And even if they had one back then, it would have to be a profit-sharing plan unless it was a pre-ERISA money purchase plan. So for the vast majority of governmental entities, salary deferrals would not be permitted in the kind of plan you describe. However, matching contributions are permitted. For example, in a 457(b) plan, any employer contributions directly to the plan would count against the maximum limit on contributions to a 457(b) plan ($19,500 in 2020). What many governmental entities do is to have employee deferrals made to the 457(b) plan, but to have contributions matching those 457(b) deferrals made to a money purchase or profit sharing 401(a) plan.

Put them on your prototype now, give them a discount on restatement?

Get paid in advance!

Yes. perkinsran, what C.B. Zeller is pointing out is that the 401(a)(4) test is as a BRF, so my example of passing the ratio percentage test is overkill. It would appear that the match here would satisfy current availability (1.401(a)(4)-4(b)), but whether it passes effective availability (1.401(a)(4)-4(c)) depends on facts and circumstances. Again, I would be skeptical regarding both tests, although if you pass the m test, seems like your facts and circumstances for effective availability would have to be pretty good. Presents sort of an interesting compliance issue, because you won't know until you test actual contributions whether you are passing 401(a)(4). Same for 401(m), but there is of course a correction mechanism for a 401(m) failure. I guess at least arguably you could base your BRF/401(a)(4) conclusion for the year based on ACP after distributing any excess aggregate contributions and/or making QMACs, though, so maybe OK. But even if you pass 401(m), there is no guarantee that the match was effectively available.

It probably will fail both, but you won't know if it fails 401(a)(4) until you have tested the group that gets the match. If the group that contributes at least 5% and therefore gets the match passes 410(b) (for example, the percentage of NHCEs who contribute 5% is at least 70% of the percentage of HCEs who do), you would be OK for 401(a)(4). For the 401(a)(4) rules, see 1.401(m)-1(a)(ii) and 1.401(a)(4)-4(e)(3)(iii)(G).

Also, the plan’s administrator might want its lawyer’s advice about exactly which person—administrator, trustee, custodian, recordkeeper, third-party administrator, or another service provider—has responsibility for this tax-reporting decision. And if the reporter wants to finish its work on 2019 1099-R reports within the next eight business days, one imagines the reporter might not wait for further Treasury or IRS guidance.

The catch-up limit for 2017 is still $6,000, but the 415 limit is now at $54,000. Thus a total of $60,000 is possible in 2017. A catch-up deferral can go above the 415 limit. Note that the owner's wages could be as low as $54,000 and still allow a total of $60,000 if at least $6,000 is done as an elective deferral, but that’s another side topic. So, where is the basis in the law? Let’s look at the law, as passed by Congress, Internal Revenue Code Section 401(m)(1), which states: In general. A defined contribution plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee contribution for any plan year only if the contribution percentage requirement of paragraph (2) of this subsection is met for such plan year. Be sure to look at the term employee contribution – this is a voluntary after-tax contribution. This is not the same as a salary deferral election which is defined as an elective deferral. Thus, employee contributions (same thing as voluntary after-tax contributions) are lumped into the same nondiscrimination bucket as matching contributions. Seems clear. The rest of that section of the law goes on to explain a little about ACP testing with the limitations and it provides for the Treasury Secretary to write regulations (yes, the regulations apply too). So that is the basis under the law. As to all the details, I personally find the regulations to be clear about including after-tax contributions in this test, no ambiguity about that question. Look at Treasury Regulation 1.401(m)-2. Please note that the law has a clause to allow the regulation to interpret the law, and unless the regulation contradicts the law, the regulations are generally treated as having the weight of the law. After-tax contributions have been around for decades, so I have not heard that there was any confusion about this. Who, or where is this confusion stemming from?