Testing match contribution based on years of service

[Guest LoloV]

I am working on testing a plan with different match rates depending on YOS. The service groups and match rates are as follows:

0-3 YOS 0%

4-10 YOS $ for $ up to $1,000

11 + YOS 2$'s for every 1$ up to $667 deferred

I know the match formula needs to be tested for "availability" using the coverage testing principles. Following is an example of how I am interpreting the testing requirements for this type of match formula...

HCE's HCE% NHCE's NHCE% Coverage

Rate Group 1 3 21% 10 29% 138%

Rate Group 2 4 29% 15 42% 145%

Rate Group 3 7 50% 10 29% 58%

Total 14 35

Based on the above I would say Rate Groups 1 and 2 pass but Rate Group 3 fails.

If anyone is familiar with this type of match formula and testing requirements, I would appreciate your input.

Thanks!

[Guest LoloV]

Sorry, the headings on my example didn't line up...

Group 1 has 3 HCE's and 10 NHCE's

Group 2 has 4 HCE's and 15 NHCE's and

Group 3 has 7 HCE's and 10 NHCE's

[Tom Poje]

agree that rate group 3 fails (ratio percentage), obviously passes the safe harbor % since it is greater than 50%, so you need to pass average benefits percentage test.

for the other groups, my understanding, is that you count those individuals who received at least as much...

thus for group 1

you have 14 hce and 35 nhce so 100%

rate group 2 how many ees can receive at least the $1000

you have 7 hce and 25 nhce

25/35 / 11/14

90.9%

[austin3515]

How could zero to three years of service be zero percent?

Doesn't that cause a problem?

[Guest dietpepsi]

I don't see anywhere where it says you have to pass the ABT if you fall below 70% but are above the safe harbor percentage for a current availability test. Where is that coming into play? Thanks!

[MWeddell]

I don't believe having no match until 4 years of service is a problem. The 410(a) rule that only 1 year of eligibility service (or in one exception 2 years of eligibility service) may be required applies to the whole plan. The concept that the 401(m) portion is tested separately applies to 410(B), not 410(a). This interpretation is not universally held, so you may want to check with your attorney.

What you're testing is whether the availability of a higher match rate is a discriminatory benefit, right, or feature. If you walk through the cross-references in the regulations, you'll find that you only need to pass the nondiscriminatory classification test (i.e. coverage testing except not the average benefit percentage test). That means that rate group 3 also passes. Good news!

[austin3515]

Answer me this - I have immediate eligibility for the 401(k) and evern the match portion of my Plan. Can I then make people wait 4 years to be eligible for the profit sharing?

Essentially, the match plan has a three year service requirement, doesn't it?

[austin3515]

DietPepsi -

401(a)(4), general nondiscrimination testing applies when there are different rates for different people. In order to pass this test, each "rate group" must pass 410(B). If a rate group doesn't pass the ratio percentage test, then you may pass the average benefits test.

Rate Groups are defined as each HCE, and all other employees with allocation rates at least as great as that HCE. People with rates lower than that, are treated as not benefitting. So if there's 10 HCE's. there could be 10 rate groups (unless of course, as in this example, several HCE's have the same rate).

[Tom Poje]

Austin: Diet is correct in regards to BRF (I was thinking of 410(B))

under 1.401(a)(4)-4(B)

when testing current availability you satisfy 410(B) without regard to the average benefits percentage test.

It is a special provision for BRF testing.

[austin3515]

So there's different tests - one for contributions and one for different rates? Or am I missing the boat here?

[Guest LoloV]

This is the first time I've run across a match formula like this. I read an "Advanced Plan Design Q&A" titled "Matches Based on Length of Service" dated May 27, 1999 regarding this. The example given there does indicate a lower match rate (25%) for 0-5 YOS and 50% for more than 5 YOS.

I can see the concern about the first group actually receiving nothing. To be honest, I'm not sure what to do with this. I think I'll give the info I have come up with to the relationship manager and recommend getting some legal advice.

Thanks all!

[Tom Poje]

well, the problem is, especially when responding to threads, is jumbling things up.

step 1 is 410(B) coverage - the above example might fail the 401(m) portion if you had enough NHCEs in the 0 group and no HCEs in that group. a very likely case. In that situation, you could still pass avergae benefits test - which would be both tests.

step 2 is the ADP/ACP test, which again might fail if you have a bunch of NHCEs at 0, as is happening in this case.

step 3 is the BRF, which works like the 410(B) with the exception that there is no average benefits % test to worry about.

hopefully I haven't missed something in this very brief explanation.

[austin3515]

So for step 3, all you need to do is pass the nondiscriminatory classification test? Or does it need to pass the ratio percentage test?

Also, does the general nondiscrimination test apply because people are getting different rates?

Feel free not to respond, this thread is getting old...

[MWeddell]

That's right. For step 3, the benefits, rights, and features test, one only need pass the nondiscriminatory classification test, not the average benefit percentage test.

[Tom Poje]

I'll respond, mainly for an explanation reason.

you said

"does the general nondiscrimination test apply because people are getting different rates?"

look at it this way:

there are 'always' 3 nondiscrimination test

ADP for deferrals (maybe QMACs and QNECs)

ACP for match (Maybe QNECS, QMACs and after tas

401(a) for the non-electives. if the plan is a safe harbor plan, you are deemed to pass. (Same logic with a safe harbor 401k - you are simply deemed to pass)

so, you have different rate, but they end up getting tested under the ACP test. the acp test is the general nondiscrimination test for matching contributions.

as for step 3, the actual regs in 1.401(a)-4 simply says

"current availability...is satisfied if....satisfies section 410(B) (w/o regard to the average benefits percentage test)."

in other words, pass either ratio or nondiscrimination clssification

[Tom Poje]

I'll respond, mainly for an explanation reason.

you said

"does the general nondiscrimination test apply because people are getting different rates?"

look at it this way:

there are 'always' 3 nondiscrimination test

ADP for deferrals (maybe QMACs and QNECs)

ACP for match (Maybe QNECS, QMACs and after tas

401(a) for the non-electives. if the plan is a safe harbor plan, you are deemed to pass. (Same logic with a safe harbor 401k - you are simply deemed to pass)

so, you have different rate, but they end up getting tested under the ACP test. the acp test is the general nondiscrimination test for matching contributions.

as for step 3, the actual regs in 1.401(a)-4 simply says

"current availability...is satisfied if....satisfies section 410(B) (w/o regard to the average benefits percentage test)."

in other words, pass either ratio or nondiscrimination clssification

[austin3515]

You guys are the bomb!

Thanks