increasing tiered match formula

[Guest nipa]

I have a plan where the current match is 50% on the first 3% and 100% on the next 3%, no match above 6%. Now I have been informed the increasing tiered match formulas are not allowed. I have been pointed to look at Reg Section 1.401(a)(4)-4(e)(3)(iii) (g), but cannot find. Any help or direction will be appreciated. Thanks

[Blinky the 3-eyed Fish]

I am not sure who informed you that a tiered match is not allowed because it is a bit more complicated that that. The rate of match must satisfy the benefit, rights and features (BRF) test.

The first part of the test is the currently availability test, which certainly passes in this case because the rate of match, if one defers enough, is available to all. The second part of the test is the effective avaliability test. This is strictly facts and circumstances. What you would need to ascertain is whether or not enough of the nonhighly compensated employees versus the highly compensated employees are able to defer 6% of compensation and reap the full match. I won't even speculate as to what percentage that may be as I have no actual experience with such a determination by the IRS.

[Guest nipa]

Thanks Blinky - you confirmed the method that we have been using to satisfy the BRF test each year.

[MWeddell]

It strikes me as extremely unlikely that a match on the first 6% of pay would be found to violate the effective availability test. The examples in the regulation indicate the test is designed to prevent much more outlandish practices. I doubt that you need to do any BRF testing to justify that this match formula is permissible.

An increasing tiered match is prohibited for plans designed to meet the 401(k) & 401(m) safe harbor rules but otherwise are not prohibited.

[Guest joe22]

How about an enhanced match like this....100% of the first 4% plus 500% of the next 2%? It seems to satisfy the IRS requirements for a safe harbor enhanced match but I would appreciate anyones comments since the percentage I want to use is over 100%.

[R. Butler]

How about an enhanced match like this....100% of the first 4% plus 500% of the next 2%? It seems to satisfy the IRS requirements for a safe harbor enhanced match but I would appreciate anyones comments since the percentage I want to use is over 100%.

This does not satisfy the enhanced matching provisions. "...under an enhanced matching formula, the rate of matching contributions may not increase as an employee's rate of elective contribution increases." See IRS Notice 98-52, Section V.B.1.a.ii

[Tom Poje]

ERISA Outline book specifically states (2003 edition, 11.294) that a tiered match similar to the one listed must be tested for effective availability.

as for Joe's enhanced formula: I don't think that is possible for an enhanced match. The rate of match cannot increase as the rate of deferral increases.

Nice try, though.

[Blinky the 3-eyed Fish]

I doubt that you need to do any BRF testing to justify that this match formula is permissible.

Just curious if you have any experience with the IRS in a situation like this. Personally, I am not sure that just because the match does not exceed 6% that there is a free pass. Anyone have a cite that I am not aware of? What if the plan is for a low paying industry and no NHCE deferrs over 3%, yet the management freely does? Again, without some specific cite that this passes, I would see that as a problem.

[Brian Gallagher]

plus, isn't the maximum enhanced 100% of the first 6%? if that's the case, 500% of 5 & 6% wouldn't qualify anyway.

[R. Butler]

plus, isn't the maximum enhanced 100% of the first 6%?

I may be misunderstanding what you are saying, but I don't see anything prohibiting a 500% of the first 6%, as long as it the match rate does not increase as the rate of deferrals increase.

[WDIK]

After first reading this thread, I was more confused than normal. Upon rereading (several times), I realized that some of the posts are based on the assumption that the formula is trying to qualify under the safe harbor rules while others assume that the formula is trying to qualify under the benefits, rights and features test.

Just a note to clarify for others who may also be synaptically-challenged.

[Alf]

500% of the first 5% or 6% of deferrals should qualify as a ADP and ACP safeharbor enhanced matching formula.

[Earl]

Since we are talking about match formulas, I just took over a case where the match formula is 100% up to $1,000 for all employees and for employees who are catch up eligible (but not necessarily making catch up contributions) there is an additional 100% up to an additional $1,000. (Guy age 60 defers $2,000, he gets $2,000 match; Guy age 40 defers $2,000, he gets $1,000).

Would the additional match be a benefit structure tested for coverage? Would a guy age 50+ deferring $0 - $1,000 be deemed benefitting? If it passes coverage would a normal ACP test then apply?

I hate to just say "You can't do that" without some clue why....

Thanks

[Tom Poje]

that would seem to violate 1.414(v)-1(d)(4) of the regs

[its 1(d)(3) of the original proposed regs]

...a catch up eligible participant is not treated as having a right to a different rate of match of allocation of matching contributions merely because an OTHERWISE NONDISCRIMINATORY SCHEDULE of matching rates is applied to elective deferrals that include catch-up contributions.

[R. Butler]

Let me shift gears a little. Employer wants to match only for employees earning more than $66,000. Seems to me that this would be subject to BRF testing. It also seems to me on its face (although I haven't seen much data on the employees) that this this is unlikely to pass that test.

Am I missing something? This is a fairly large financial service company that thinks they can do this.

[KJohnson]

R. Butler

You would have to pass 410(b) coverage even before you came to BRF. It seems that if they pass coverage they would probably satisfy BRF because isnt' the BRF test just 410(b) coverage withtouth the ABT?

[Tom Poje]

Earl-

Maybe I will backtrack a little on my earlier comment, depending on what the document says.

If the formula is simply 100% of all deferrals, and a cap on deferrals at $1000 I think you are ok, even under the universality rule. If there was a different rate for catch ups then you would have a nondiscrim issue.

[MWeddell]

Yikes, this thread did meander around a bit since the last time I checked in.

I agree that a match of 100% on the first 4% of pay deferred and 500% on the next 2% of pay deferred is not permitted in a plan designed to meet the 401(k) or 401(m) safe harbors.

If we're talking instead about a plan that must meet 401(k) and 401(m) testing, obviously whether the match is actually credited to HCEs in a discriminatory fashion is governed by the 401(m) test. In my opinion, there is no benefit, right, or feature testing issue because it is a uniform matching formula that is available to all eligible participants. While it is true that in the ERISA Outline Book, Ch. 11, Section XII, Part E.3.b.1 it says that the tiered match might need to be tested for effective availability, if one follows the cross reference to Ch. 9, Section X, Part C and also reads all of Treas. Reg. 1.401(a)(4)-4©, you'll see that there are no facts that support that there's a benefit, right, or feature problem. The match is in fact currently available to all, but one suspects that it is less likely that NHCEs will use the full match -- that's a 401(m) concern not a BRF concern. The examples in Treas. Reg. 1.401(a)(4) concern cases where NHCEs can't grow into the conditions regarding availability of the feature or the feature isn't communicated to them, circumstances not present in this example.

Blinky, I don't really have experience with the IRS on this. Yes, I've obtained a detemination letter for a client with a tiered match where the match increases, but since there's no BRF testing issue in my opinion, I didn't ask the IRS to specifically rule on the possible BRF issue. If no NHCE defers more than 3%, then the 401(m) test is likely to fail and will need to be corrected but it's still not a issue regarding whether the match was available to NHCEs.

RButler, does the plan you're talking about allow employee after-tax contributions? If not, then I agree with KJohnson's reply that it's a 410(b) issue (and one that sounds like it might fail for most employers). If it does allow employee after-tax contributions, then the fact that the match is available to only some of the 401(m) eligible participants is a BRF issue (and again passing it may be a challenge).

I agree with Tom Poje's responses to Earl's questions.

[Earl]

So if the people getting match on catch-ups passes 70% ratio percentage test I would just run acp as normal?

(I should have started a new thread with my question/scenario...)

Thank you.

[Tom Poje]

If the formula for match catch ups is the same as for the regular match I don't think you won't have to worry about the 70%. In other words, a single formula doesn't have to worry about BRF

however, the possible issue is how the document is worded as to the cap on deferrals.

the example used by Corbel was:(and this is a brief version)

Plan limits deferrals (regular and catch-up) to 60% of pay.

Jim is catch-up eligible and makes $20,000.

Thus Jim's deferrals cannot exceed $12,000.

Since the plan has imposed a limit that a catch-up eligible participant can't exceed, the plan violates the universability requirement.

[Earl]

Actually there are separate formulas on the match for regular deferrals and catch up deferrals.

Both are matched $ for $ up to $1,000 (for each type of deferral).