401(m) and coverage test

[Guest dpk]

Appreciate insight on the following:

Plan requires employee to contribution between 2% to 12% of compensation as after tax contribution to become a Participant in the Plan. However after 3 consecutive years of participation employee no longer required contribute.

Employer provides a contribution to all Participants allocated by Compensation.

We are to doing the coverage and non-discrimination testing.

It seems to me that the Employer Contribution would be considered a 401(m) matching contribution for the first 3 years of Participation. After 3 years of Participation it becomes a Profit Sharing Contribution?

[Mike Preston]

Unless the employer contribution varied with the level of employee participation, it doesn't sound like a match to me. Does the employer contribution vary with the level of employee participation?

[Guest dpk]

Mike, that was my initial thought but then I got hung up on the definition of a matching contribution to be "any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee contribution made by such employee"

This doesn't mention anything about how the employer contribution is allocated.

[Mike Preston]

The regs talk about it in the sense of a facts and circumstances analysis. But, there again, there is no specific relationship required. Maybe it makes sense to back up a step. If the individuals are not considered participants unless they are making contributions, then I would vote for the contribution not being a match. OTOH, if they are participants one way or the other, and if they make an employee contribution they then are eligible to share in the company contribution, it sounds like the plan sponsor might reasonably conclude it is a match, at least as defined in the Code and regs. I'll search my database of IRS Q&A's to see if there is anything else.