Discretionary Match

[DP]

I have a small manufacturing client with a 401k Plan. The plan has a discretionary match which has never been funded. No last day rule.

There are 16 employees: 1 HCE, 10 hourly employees, and 5 salaried employees.

Due to the economy, the company recently laid off all their hourly employees. They are wanting to make a discretionary match for 2003 where the hourly employees get a higher rate of match than the salaried employees. Also the HCE does not want to receive a match.

I plugged in the numbers and all ADP/ACP tests pass. Am I overlooking anything with the two rates of match between the salaried and hourly employees?

[Tom Poje]

1. as far as I know, it doesn't matter whether the HCE wants the match or not - if according to the terms of the document, he is eligilble how can you avoid not giving the HCE the match.

2. Fir the sake of the argument, if the HCE didn't defer and therefore received no match, and assuming there are no other hces, then the ADP test passes.

3. Based on the facts, you have a partial termination and all hourly employees would be 100% vested????

[QDROphile]

Do the written terms of the plan allow two rates?

[DP]

The current plan allows for a discretionary match proportionate to elective contributions. (It has not been restated for GUST.) We were going to amend the plan outlining the two rates of match and omitting the HCE from receiving a match.

All accounts are 100% vested.

[RCK]

At the risk of sounding cynical here, how does a manufacturing company have five (or sx) salaried employees and no hourly employees?

Other than that, I agree that you can amend the plan to create the structure that you want. Since the match is discretionary, I believe that you can still do that up to the end of the plan year.

RCK

[DP]

RCK, This company is in the process of closing their plant. The hourly workers were laid off last week. The salaried workers will be terminated within a few weeks.

[Blinky the 3-eyed Fish]

Other than that, I agree that you can amend the plan to create the structure that you want. Since the match is discretionary, I believe that you can still do that up to the end of the plan year.

I disagree. Just because it is discretionary does not give license to alter the provisions once a participant has earned the right to the allocation. With no last day requirement, it would seem we are past that point I assume. The hourly employees are already terminated, so we are talking about matching deferrals that have already taken place.

[401 Chaos]

I also read the question to suggest they will provide retroactive matches on the hourly employees' prior deferrals since they are providing a higher rate for the hourly employees--sounds like the only hourly employees at issue are the ones already terminated. I hate to further the cynicism, but if that is the case and the hourly employees that are to get a greater rate of match have already been laid off and the company (or at least the plant) is going under, it seems like everyone probably has bigger fish to fry than amending the plan for a new match at this point. If I were a laid-off hourly employee I suspect I would much prefer some additional severance amounts, even a minimal amount, than having a match added to my 401(k) Plan.

It is my understanding that 401(k) plans can have different rates of match for different groups (types of employees, length of service, etc.) but that these different rates become a separate benefit, right or feature thus requiring each group to pass separate testing. Shouldn't be any problem here but multiple rates can create some additional concerns in some cases.

[DP]

Here are a few more details about this company. The discretionary match will be retroactive back to 1/1/03. No participants have terminated during the year.

The company is in a financial crisis. However in their PS plan there is an unallocated account containing suplus pension money which was to be used over the next few years. The company is wanting to drain this surplus account by giving the employees a large match for 2003 - approx 300% match for the hourly employees and about 160% match for the salaried employees. The president of the corporation wanted to forego his match so more of this surplus money could be allocated to the staff. They wanted the hourly employees to get a larger match since they have been laid off, and this was the company's only way of helping them. The salaried employees will still be drawing a paycheck for a few more weeks/months so they decided on a lessor rate of match for them.

[401 Chaos]

Thanks for the additional info--their proposed plan makes more sense now. I am not aware of any reason why the company could not do the varying rates as they propose.

[Guest asire2002]

To follow-up on a few of the prior posts:

1. Your document already contains a provision for a discretionary match, and it appears there are currently no accrual conditions attached to that, i.e., if the company decides to make a match, all persons who deferred would be entitled to receive it. Although you can choose not to make a match at all, since it is discretionary, you probably cannot alter the way in which participants will share in any discretionary match that is made, i.e., you probably cannot change how you will allocate the discretionary match between hourly and salaried after the year has already begun, at least with respect to deferrals which have already been made.

2. In my view, the safer course of action would be to add a fixed formula match to the plan (rather than change the basis on which a discretionary match will be allocated) and give a greater rate of match to hourly employees than to salaried employees, while at the same time excluding the HCE from eligibility for the fixed formula match. This may seem like form over substance, but that is the way I would approach it if the client was absolutely set on doing this.

3. Of course, qualified plans are not allowed to have unallocated amounts sitting around as it appears your client has here. You can have a 415 suspense account, and you can have a temporary forfeiture account, but just having money sitting around inside of a qualified plan until the company decides to allocate it violates the definitely determinable rule. Did these assets come from a terminated DB plan?

[DP]

Did these assets come from a terminated DB plan?

Yes.