Matching Formula Based on Total (not 401(a)(17)) Comp

[lkpittman]

Can anyone give me a green light on this? Employer provides a match that is stated in the plan as 100% of the first 4% of comp deferred, plus 50% of the next 2%. Employer has always based this formula on total comp, rather than the 401(a)(17) comp. In other words, with $210,000 total comp and maximum deferral of $10,500, under this formula, the match would be $10,500. If you use $170,000, match would be limited to $8,500. Of course, $170,000 is used for testing, etc. Any comments?

[MWeddell]

Was this question hard to ask with a straight face? No, that's not a permitted plan design.

Problems are:

(1) It violates Code Section 401(a)(17), and

(2) When considering only compensaiton less than 401(a)(17), it gives a higher rate of match to some HCEs than is available to any NHCEs, which will cause the rate of match, which is a benefit, right, or feature, to be discriminatory in violation of Treas. Reg. 1.401(a)(4)-4.

[jaemmons]

My office comes across this ALL the time, especially when the client is calculating the match in-house. It's hard to explain that a forfeiture of the match based upon comp above IRC 401(a)(17) MUST occur, but when you put it into terms of potential disqualification of the entire plan, if it is caught under audit, they seem to listen. Good lucK:)