questionable match formula

[AndyH]

Plan match provision calls for 50% match, increasing to 100% after employee has deferred for 4 calendar quarters.

How to test under 401(a)(4)? Brf match test with two groups, those at 50% and those at 100%?

Other issues or problems with this? I don't like it, but am having trouble pinpointing the faults.

[rcline46]

Memory seems to tell me that if the formula difference is only due to passage of time, separate BRF testing is not needed.

Of course the ACP has to be passed.

[Medusa]

This topic has been discussed in other threads, you might want to do a search. You will have to test for nondiscriminatory availability of each rate of matching contributions. In your situation, everyone is eligible for the 50% rate, so that rate is not a problem. The 100% rate has to be tested. You will need perform a ratio % test taking the people who are eligible for the 100% rate over the group as a whole. The result will need to be greater than the safe harbor percentage under 1.410(B)-4.

[AndyH]

Right. That's my take as well. But what about the dependency of the formula on the deferral. If the plan matched at 50% for employees with 1 year of service, then 100% for employees with two or more, then fine. But that's not what this one does. The rate of match is dependent upon the elapsed time a person defers.

So, the match is not dependent upon service, age, pay; nothing but the period of time a person has deferred.

Just seems to me that this design must run afoul of something.

Maybe not; maybe I'm just paranoid about takeovers!

p.s. actually, I don't agree exactly about the test. I think there are two groups, the one at 50% and the one at 100%, not one. The 100% people are not in the 50% group, as I understand it.

[Medusa]

I don't think having the match depend on a period of deferral vs. a period of service is significant.

I don't agree about the testing groups. The way I look at it, your formula is equivalent to saying that everyone gets the 50% rate, and the people who have the required deferral-service get a supplemental match. How could it possibly make sense that the 50% group could be a discriminatory group. The Service would have no problem with the 50% group in this scenario consisting primarily of HCE's.

[MWeddell]

I agree with most if not all of Medusa's posts.

It sounds like everyone is eligible for the 50% match, so that's not a BRF available to only some employees. The fact that some people choose not to defer at all doesn't change that the 50% match is available to them.

As I understand it, to get the 100% match is not a service requirement and hence cannot be ignored. Suppose you have a calendar year plan and are doing snapshot testing as of 12/31. I'd say that the 100% match level is currently available to (1) employees getting the 100% match on 12/31, (2) employees who received the 100% match earlier in the fourth quarter but suspended their elective deferrals, and (3) employees who received the 100% at any time during the third quarter but suspended their elective deferrals. All of those employees, if they'd have chosen to contribute on 12/31, had the 100% match currently available to them on 12/31.

If the plan passes BRF, I don't see any other compliance problems here. It feels like it might violate 410(a), but because this is not a coverage issue, it's okay.

[rcline46]

I reviewed 1.401(a)(4)-4(B)(2)(ii)(A)(1) "any specified age or service condition with respect to an optional form of benefit...is disregarded."

Also see ....(B) "....application for benfits or similar ministerial or mechanical acts, ..."

I think the wait is ignored and everyone is considered eligible for the 100% match, so no 410(B) question.

SHould you disagree, then the testing as described is correct. And it would be all at 50% and some at 100%.

[Medusa]

rcline46: I think the confusion is because while age/service requirements are disregarded in determining optional forms of benefits, the right to a specific rate of match is not an optional form of benefit, but is a right or feature. Rights and features are not able to disregard age or service requirements. See 1.401(a)(4)-4(e)(3)(iii)(G).

[rcline46]

I will review when I get back to the office. My position is if the different rate of match were hourly to salary, division a to division b or some such thing, I would fully agree testing is required.

This different rate is substantially available to all employees, and is contingent only on deferrals. For now (until I can review - doing so online is too hard) we can agree to disagree.

[MWeddell]

It feels like piling on until rcline46 gets a chance to review the regulation, age and service conditions can only be disregarded for optional forms of benefit or social security supplements. I also think this is a participation requirement, not a service requirement. Furthermore, I can't see considering the 100% match level "currently available" to everyone when that's frankly not true -- it takes a year's worth of deferrals first.

I stand by my earlier post.

[rcline46]

I agree that age/sevice applies to optional forms, not match levels.

-4(B)(ii)(B) gives us ... application for benefits OR SIMILAR MINISTERIAL OR MECHANICAL ACTS,... (emphasis added). I would equate enrolling for deferrals is similar to applying for a benefit. This application then triggers both the first level and second level match.

It is similar in concept to mandatory contribution plans where coverage testing does not have to be proven where the rate was 6% or lower.

Effective availability has not been addressed, but I believe it passes without question.

I may be a lone voice in the wilderness, and only AndyH can apply to the IRS for a ruling (its his plan). Did prior TPA have any notes on why they thought acceptable?

[MWeddell]

Having contributed for an entire year doesn't strike me as fitting within the "application for benefits or similar ministerial or mechanical acts" clause, but I guess we choose to disagree.

[Medusa]

Sounds like MWeddell and I are on the same page. The 401(m) regulations (specifically 1.401(m)-1(f)(4)) make a distinction between a "ministerial or mechanical act" and the imposition of a waiting period. You would have to convince me that the distinction is different under 401(a)(4). So far, that hasn't happened.

[Tom Poje]

for a further discussion, see ERISA Outline Book, 11.249 (2001 Edition) possibly chapetr 11 part E.3.b in earlier editions as well.

'1.401(a)(4)-4(B)(2)(ii) disregards a service condition for determining whether an optional form of benefit is currently available on a nondiscriminatory basis. this rule does NOT apply to determing whether the current availability of a rite or feature, such as rate of matching contribution is available.'

I don't know if that helps or not. I can not tell from the original question if the formula stated is

1. every year ee gets 50% and at the end of the year will get an additional match if he deferred each quarter.

or

2. ee defers for 3 quarters. If he defers in a 4th quarter, then he gets 100% every quarter after that point in time.

certainly, if match is based on service e.g. 50% for 3 years and 100% after 3 years you have to test - there are enough examples of those scenarios. I am not sure how this is any different than that.

In case 1 you might be able to argue otherwise, although if it was a company with high turnover, then 'effectively' only long term HCEs might be benefitting. well, suppose its a golf club, with lots of seasonal help. that help would only be able to defer maybe 2 quarters each year, where the owners could easily defer 4. Dang, I think I talked myself out of that possibility as well. I would test for BRF.

[rcline46]

The fundamental question is whether or not accessability (current availability) to the enhanced matching formula meets one of the exceptions to testing under the BRF rules.

Service is not the issue although component plans may help the situation for those under the most restrictive eligibility should testing be required.

Medusa shows the regulations clearly differentiate between service and 'minesterial' functions, in that, as we all know, for 401(k) purposes merely satisfying eligibility is enough to be considered benefitting (and the reg pointed out says the same for matching contributions). And of course passing the ACP test is the ultimate non-discrimination test.

If the enhanced level makes you feel uncomfortable, then by all means test, and request an opinion from the Service.

But the regulation clearly states (in my opinion of course) that enrolling is a ministerial or mechanical act, and that is necessary to get the 4 quarters in to get the enhanced match, and that is one of the exceptions. Thank you Medusa for finding that reference.

[AndyH]

Tom, the situation is number 2 in your comments. At least, that's what is supposed to be done. In fact, of course it's been messed up.

[rcline46]

AndyH - what are you doing to me!!! It seems we have at least 2 interpreations (following from Tom's analysis):

1. Once you have deferred in 4 calendar quarters, you become eligible for a 100% match in the 5th quarter and forever thereafter. A one time deferral in each quarter counts. Quarters can be any time.

2. If you defer in 4 calendar quarters IN THE SAME YEAR you get an extra 50% AT THE END OF THAT YEAR. You must restart the 4 quarters each year.

I have been arguing no. 1.

On number 2 it looks like a 50% ongoing match with an EOY 50% extra match. The EOY extra match must pass the same 410(B) tests as any EOY match. I would NOT consider this a BRF situation! This is two separate matches with different rules.

[AndyH]

Sorry for any confusion. Seems fairly straight forward to me. One year of service to get in plan. Then, match is 50%, permanently increasing to 100% after another year (provided the employee deferred for the full year). If not, match stays at 50% till 4 elapsed quarters of deferrals.

I don't know if the fourth quarter is 100% or 50% off hand, (probably 50%), but I don't see how the answer would be different on how to test and what the other issues are, if any.

Thanks for the comments.

[Kirk Maldonado]

Would restructuring provide any help, or is that precluded under Section 401(m)? I seem to recall that use of restructuring is precluded under Section 401(k).

[MWeddell]

I misunderstood the facts in yet a different way, so some of my prior comments may not make sense. I had thought that one gets 100% match only in 5th and successive consecutive quarters of deferrals and that it could fall back to 50% match if one went a whole quarter without making deferrals.

[Medusa]

Well, at least I apparently did read the question the way it was intended!

In any event, I still maintain that there is a vast difference between the ministerial act of completing an enrollment form, and the affirmative act of deferring.

[Tom Poje]

fun stuff, huh? aint it odd how a 'simple' formula can be understood in at least 2 or 3 ways? made for an interesting discussion, each of us defending a position and oblivious to the other individuals view of the issue!

and yet another possible argument...

for coverage purposes the IRS does not say you actually have to defer, you simply have to be able to defer.

so, does the document say I have to defer > nothing to satisfy a quarter requirement? and if it is silent, then how do you address the issue. from the original thread it said 'after the individual has deferred for 4 quarters'- just what does that mean?

(You can have your document, I have enough headaches)