Impact on 401(a)(4) of using match to satisfy top heavy minimum?

[AndyH]

If a match is used to partially satisfy the top heavy minimum in a non-safe harbor 401(k) plan, is the additional employer contribution to get to 3% subject to testing under 401(a)(4)?

How would the non-match top heavy minimum be treated if the discretionary contribution were subject to general testing for other reasons, e.g. cross tested formula?

For example, assume a plan's discretionary formula must be general tested, and it happens to be top heavy and one person gets a match of 2%, but is ineligible for the discretionary contribution. Presumably the employer must contribute an additional 1% to satisfy top heavy testing. Would this 1% be treated as a discretionary contribution for purposes of the NCT portion of the general test. Presumably yes.

Second example: The plan has no discretionary contribution other than a top heavy minimum Assume an HCE gets a 2% match which must be supplemented by a 1% discretionary contribution. Is this subject to general testing under 401(a)(4)? because it is non-uniform?

[Mike Preston]

Yes, it is subject to a4, but is generally given a free pass if the only formulas available are safe-harbor and top-heavy.

If the other formula was cross-tested, the additional amount would just be part of the testing.

Presumably yes.

I wouldn't think so, because you look to the answer to the first paragraph above and see that it is given the free pass.

Of course, all of the above is based on a quick reading, not an indepth one, so I welcome other thoughts.

[AndyH]

Thanks for your comments, Mike. I presume that by "free pass" you are referring to the multiple formula exemption under 1.401(a)(4)(2)(vi)?

I'm having trouble determining if that would help or not. Obviously that contemplated a minimum formula of 3% of pay, but would that logically extend to 3% less a company match? Would that be uniform?

And even if so, it would seem that there still is an issue for a Key employee who gets a top heavy minimum greater than any Non-Key?

p.s. In looking at this more, I think there is a definite a(4) issue whenever a plan uses the match towards top heavy and an HCE gets a top heavy discretionary contribution, for example in the case where the HCE does not defer. And if there is no other discretionary contribution, the test will most likely fail. Anybody disagree?

[Mike Preston]

As I said, I just briefly followed the logic, but, yes, (vi) doesn't seem to say anything other than if it is in response to the top-heavy minimum requirement of 416©(2), you are ok. And 416©(2) incorporates the match, so I think on a non-discrimination level you are ok.

That is, of course, if the plan's formulas are safe-harbor.

If they aren't, then you have to test and I agree with you that I think you would fail.

[AndyH]

Mike, I do not mean to be a pest about this issue but I respect your views immensely.

I suspect that my question was not clear enough. Unknown to me at the time, a colleague of mine asked the same question of TAG. Below is the question, and the answer we received. Maybe this is clearer. I have redacted the names. Do you agree? I agree with the conclusion except that I would replace "non key participants" with "HCEs".

QUESTION

With the changes in EGTRRA, I understand that matching contributions can be used to satisfy the top-heavy minimum requirement and also be used in the ACP test.

My question is, does the employer allocation provided to participants who have not received a match, assuming there are HCEs, who did not defer and did not receive a match, and are thus receiving a full 3% employer allocation, now subject to 401(a)(4) testing since HCE(s) are receiving 3% employer allocation, and many NHCEs are receiving 0% or less than 3% since they

deferred and received a match?

ANSWER

Good question. EGTRRA amended Code Section 416 to allow matching contributions to be used to meet the top heavy minimum contribution requirement. EGTRRA did not amend the nondiscrimination rules applicable to top heavy minimums, though. Unless and until we get some guidance to the

contrary, the top heavy minimums allocated to the non key participants that are not matching contributions must be tested under 401(a)(4), as an employer nonelective contribution.

EGTRRA SEC. 613. MODIFICATION OF TOP-HEAVY RULES.

(B) MATCHING CONTRIBUTIONS TAKEN INTO ACCOUNT FOR MINIMUM CONTRIBUTION

REQUIREMENTS. Section 416©(2)(A) (relating to defined contribution

plans) is amended by adding at the end the following: ''Employer matching

contributions (as defined in section 401(m)(4)(A)) shall be taken into

account for purposes of this subparagraph (and any reduction under this

sentence shall not be taken into account in determining whether section

401(k)(4)(A) applies).''

Please let us know if you have additional questions.

NAME REDACTED

Technical Answer Group, Inc.

http://subscribers.tagdata.com

[Mike Preston]

I'm not sure we are disagreeing. I agree that it must be tested under a4 as an employer contribution. The only question is whether it satisfies the definition of a safe-harbor formula under (B). It is irrelevant whether it satisfies (B) if the other employer contributions don't. In that case, since you fail 1.401(a)(4)-2(B)(4)(vi)©, it doesn't matter. If the other employer contribution satisfies (B), however, now the question is whether the THM satisfies (B).

If the THM is phrased as 3% of pay, then I don't think anybody would argue that as a separate formula it would fail (B). The question is whether a THM phrased as "3% offset by employer matching" satisfies (B). Maybe not. But what about phrased as: "That amount necessary under 416©(2)", which now has the employer matching amount automatically built in?

As I said, I haven't gone through all of my source materials, but I think it is very possible that the IRS will eventually say that if the other employer contribution formulas satisfy (vi)©, then the superimposition of a provision which increases people to the extent necessary to satisfy 416©(2), as contemplated in (vi)(D), will not result in a claim that the plan fails to qualify as a safe-harbor design.

I guess we will know when the IRS issues LRM's for standardized plans. If they allow the THM to be defined in standardized plans as the amount net of employer match, I will have been correct in my prediction. If not, I will of course think they got it wrong. ;-)

[AndyH]

Thank you, Mike. Your analysis makes perfect sense as usual.