Match For Free

[Disco Stu]

Hi

I can't believe I've never had to think about this before, but here's my situation...

I have a participant with a 402(g) excess for the 2002 calendar year. The plan's year is 7/1 - 6/30. I am tryring to decide whether and when I might have a match for free problem.

I think the question comes down to whether the contributions which are to be refunded are determined on a FIFO basis as ADP excess amounts are. Obviously, my preference is to decide that the 402(g) excess amounts are from the contributions made after 7/1/02. I would prefer to avoid revising ADP/ACP tests that have already been completed for 6/30/02.

Anyone have any suggestions about the plan year that I need to look for match for free in?

Thanks

[austin3515]

What is match for free?

[MWeddell]

Disco Stu is talking about having a discriminatory rate of match on an HCE when one considers only those deferrals remaining in the plan after corrective distributions. I'd call this a hanging match rather than match for free, but I think we're talking about the same thing.

There's nothing in the 402(g) regulations that requires that the first deferrals be treated as the excess deferrals. Yes, feel free to treat deferrals in the second half of the calendar year as the excess deferrals.

[kocak]

I would look at when the 402(g) excess occurred. Was he deferring $1500 a month, so he reaches the limit in Aug 02, etc.

Michele

[MWeddell]

I agree with the above post. I was assuming that not all of the deferrals were made in the first half of the calendar year.

[Kathy]

We always called that "orphan match" and I thought the excess was always treated as having occured on the first day of the plan year - that's where you run into trouble with off calendar years - you end up with an excess actually occuring on the first of the plan year which is usually 2 calendar years ago. But, I could be wrong - I think it might have happened once before.

[E as in ERISA]

I didn't think that refunds of excess deferrals created a discriminatory rate of match under the BRF regulations under 401(a)(4).

[Blinky the 3-eyed Fish]

Katherine, may I ask why you think that?

[MWeddell]

Katherine - It's been clear since 401(k) regulations were finalized in 1994 that hanging match (or orphan match) creates a discriminatory rate of match that violates 1.401(a)(4)-4 unless the plan provides for it to be forfeited. If the regulations themselves aren't clear enough, read the prefatory discussion to the 1994 final 401(k) regulations.

Kathy - What's your authority for always treating the first match dollars made during the plan year as the hanging match?

[E as in ERISA]

Regulations Section 1.401(a)(4)-4(e)(3)(iii)(G) provides that the following are benefits, rights and features subject to general nondiscrimination requirements:

"The right to each rate of allocation of matching contributions described in Sec. 1.401(m)-1(f)(12) (determining the rate using the amount of matching, elective, and after-tax employee contributions determined after any corrections under Secs. 1.401(k)-1(f)(1)(i), 1.401(m)-1(e)(1)(i), and 1.401(m)-2©, but also treating different rates as existing if they are based on definitions of compensation or other requirements or formulas that are not substantially the same)."

The references are to the matching contributions determined after correction for excess contributions under the ADP test and excess aggregate contributions under the ACP (and the last was for the multiple use test). Section 402(g) excess deferrals are not mentioned there.

Which section makes 402(g) excess deferrals subject to nondiscrimination requirements?

[MWeddell]

It's not the 402(g) excess deferrals that are a problem in themselves; it's the match that's left behind in the plan.

Suppose the plan matched 50% on the first 6% of pay deferred for a maximum match of 3%. Some of the participant's deferrals were refunded because there were in excess of a calendar year 402(g) limit so that only 5% of the participant's pay remains in the plan as deferrals. If the match isn't forfeited, then 3% of pay match is a 60% match rate, a higher match rate than NHCEs. This is a discriminatory feature per the regulation you just quoted.

[E as in ERISA]

I should have said "What requires you to test for nondiscrimination on the rate of match after 402(g) excess deferrals are removed?" The section I cited says you test the rate match for nondiscrimination after excess contributions and excess aggregate contributions are removed. It doesn't say anything about the rate of match after excess deferrals are removed. I don't have it handy, but I thought Sal Tripodi's ERISA Outline book agreed that you don't consider the rate of match after excess deferrals are removed.

[Blinky the 3-eyed Fish]

You learn something new every day. After consulting the ERISA Outline Book, I agree with Katherine. See page 11.263 of the 2002 Edition on CD-ROM.

[MWeddell]

Sorry for the delay, but I did want to post after looking up the above reference that I also am now convinced that the hanging match on excess deferrals may remain in the plan. Thanks, Katherine, for being persistent about your point.

Here's the explanation from the ERISA Outline Book:

"Whether the rate of match is nonuniform is determined after correction of the ADP test, the ACP test, and the multiple use limit. See Treas. Reg. §1.401(a)(4)-4(e)(3)(iii)(G)(note that the regulation does not reference corrective distributions under IRC §402(g), because §1.402(g)-1(e)(1)(ii) provides that excess deferrals are taken into account for purposes of §401(a)(4))."

[austin3515]

Okay but then what's to stop me from telling a client to defer $15K in 2002 to take advantage of a matching contribution that is not capped (i.e. 50% of deferrals, with no limit).

They pick up an extra $2,500 in matching contributions, with no penalty from what I can see. Am I missing something?

Or is it just so wrong its ridiculous to try?

Assume for discussion that passing the ACP would not be a problem.

[MWeddell]

Great suggestion (in the right circumstances) and no I don't think it's ridiculous. Check the plan document to make sure that what you suggest is permitted by the document. Under your other conditions (no cap on what's matched, no testing difficulties), the suggestion makes sense.

[Tom Poje]

I was curious on this one.

The Corbel document I am looking at says "Matching contributions which relate to excess deferred compensation which is distributed to this section shall be forfeited."

I would argue this only makes sense. I am assuming of course the document also says something to the effect that deferrals shall not exceed the 402(g) limit. In fact, I think it has to have that language to be qualified.

If the person has exceeded the limit, you have failed to operate according to the terms of the document. You have now matched on a portion of deferrals that aren't allowed. I would argue the individual was never entitled to that match, but once those match dollars are in the plan, you can't yank them out, so it is only logical to forfeit them. Thus you never get to the point of having a 'rate of match' issue.

[austin3515]

So no rate of match issue, but that doesn't matter because a different problem exists - namely you were never entitled to the match anyway?

By the way, I have a Plan doc. (Individually designed by a reputable ERISA firm), and it also says that any match earned related to excess deferrals shall be forfeited.

[Tom Poje]

That would be my basic conclusion.

It sounds similar to not limiting comp to $200,000.

Lets say the allocation was 5% and the ee made 300,000 and was given 15000 instead of 10000. the self correction is to remove the 5000 from him or increase the others so they receive the same rate (15000/ 200000) = 7.5%

so, if I use similar logic...lets suppose match was 100%, no cap. ee deffered 15,000 instead of capped at 11,000.

so he received 4000 too much. that should get forfeited.

Now, if the match was discretionary, I am 'guessing' you might be able to argue (Ignoring the excess deferral) that the ee received 15,000 match on 11,000 deferral which is a rate of match of 1.3636% instead of 100%. Therefore, you could increase everyone elses match by that %. (In that case I guess the rate of match comes into play, even though I said earlier I didn't think it did. But now I am arguing for the possibility of looking at the whole thing differently.)

Austin, if it smells too good to be true, it probably is. you get 15 bonus points for looking in your document to see what it says. I wonder what the document of the poster of this question says, and whether we have been going through this for nothing if the document requires otherwise. Actually, I won't say for nothing, a little bit of research is good.

[Disco Stu]

I had no idea what I was getting into when I posted this question. I certainly got a lot more that I expected.

In answer to Tom's question, the plan has been just restated to the Corbel doc. Originally, I didn't think this was a subject that I needed to look in the document to get guidance on. Forfeiting 'hanging match' is one of those topics I had always assumed was a universal truth.

I guess I've gotten a lesson on more than one issue here.

[MWeddell]

Tom Poje wrote: "Austin, if it smells too good to be true, it probably is" but the key word is "probably."

Yes, it sounds to good to be true, but that's not a substitute for analyzing the issue. There's not a compliance problem with the plan document forfeiting the hanging match on excess deferrals. I'm just agreeing with the position that Katherine was originally advocating that this isn't required by the IRS. Also, I agree that many plan documents as currently drafted would require the forfeiture.

No one's convinced me that the suggestion made in Austin3515's second post is wrong. One could draft a plan document that complied with IRC 401(a)(30) by saying that participants' elective deferrals aren't initially subject to an annual dollar limit but that after the end of each calendar year any deferrals over the limit are refunded by April 15. The same plan document could provide that hanging match on excess deferrals stay in the participant's account in the plan. The plan could encourage high paid employees to contribute as much as they like in order to get as much match as possible. I believe such a plan would still be qualified.

There are some real pragmatic issue withs such a plan design even assuming one found a client that welcomed unconventional suggestions. First, it really could cause some ADP test problems (a 401(k) safe harbor plan couldn't match on unlimited deferrals). You'd have to get payroll to not monitor the 402(g) limit and stress to the recordkeeper the importance of monitoring the 402(g) limit. However, the biggest problem is that I suspect having one's high paid employees with deferrals > the 402(g) limit on their W-2s might increase the probability of IRS audit more than offsetting the value of extra match earned by these employees.