Conditioning Matching Contributions on Signing a Company Agreement

[Guest rocnrols2]

Company Z maintains a 401(k) plan and provides matching contributions. Z has discovered that a number of tis employees have failed to sign a certain agreement that requires them to disclose actual or potential conflicts of interest. Because a number of states do not consider continued employment to be sufficient consideration to signing such an agreement, Z cannot simply terminate those failing to sign. Z'a CEO suggests conditioning the matching contribution to the 401(k) plan upon signing the agreement. Does this violate any qualification requirement or ERISA requirement?

[Guest Harry O]

Quick thought is that the matching contribution is no longer considered a "matching contribution" under section 401(m) because it is no longer solely made to the plan on account of an employee contribution. It is made to the plan on account of the employee contribution AND the execution of the agreement. This means that the contribution is not subject to favorable ACP testing (which is an averaging calculation that has some wiggle room) but the general test under section 401(a)(4) (which is an employee-by-employee test that is much less forgiving).

[Guest rocnrols2]

Thanks, I was thinking along the same lines. Unfortunately, therre is not a lot of guidance on conditions to defined contribution plan contribution allocations (other than 1,000 hours and/or last day of year).

[k man]

i think harryo has it right. the regs confirm that it would not be technically a match

(A) General rule. --A matching contribution is taken into account under paragraph (b)(1) of this section for a plan year only if the contribution is allocated to the employee's account under the terms of the plan as of any date within the plan year, is actually paid to the trust no later than 12 months after the close of the plan year, and is made on behalf of an employee on account of the employee's elective contributions or employee contributions for the plan year. Matching contributions that do not satisfy these requirements are not taken into account under paragraph (b)(1) of this section for any plan year. Instead, the amount of these matching contributions must satisfy the requirements of section 401(a)(4) (without regard to the special nondiscrimination rule in paragraph (b)(1) of this section) for the plan year for which they are allocated under the plan, as if they were nonelective contributions and were the only nonelective employer contributions for that year. See §§1.401(a)(4)-1(b)(2)(ii)(B); 1.410(b)-7©(1).

[Guest Robin.Wolf]

I imagine you'd have an "Operational Failure" caused by the failure to follow plan provisions. (This assumes that the Plan document does not contain a provision conditioning the contribution on the signing of this particular agreement.) This is a type of Qualification Failure, meaning that it "adversely affects the qualification of the Plan." (Rev. Proc. 2003-44.)