Nonuniform Matching Formulas

[Guest IU1994]

I'd like to confirm my thinking on two scenarios involving nonuniform discretionary matching formulas.

Scenario 1:

Salaried employees are matched at rate of 100% and hourly employees are matched at a rate of 50%.

Is this a current availability issue, where I would test each rate of match for nondiscriminatory availability under BRF?

Scenario 2:

Participants who defer at a rate up to 3% get 100% match and those that defer at a rate higher than 3% get a 125% match (on the entire deferral, including the first 3%, so not a typical tiered match)

Seems to me current availabilty is not an issue, since everyone has the choice to defer at a rate high enough to get the 125% match. Is this then an effective availability issue, subject to a "facts and circumstances" test?

Of course I realize that all contributions described must pass the ACP test. Any input would be appreciated.

[Tom Poje]

scenario 1: I believe you are correct, though the group of ees receiving 50% would include those receiving 100%, since that group received 'at least 50%'.

as for scenario 2 - I would agree 'effectively' it might not be available to all, but that is awful hard to prove (though in reality we know that probably only HCEs can take advantage of it). I suspect unless the ACP test failed it wouldn't be an issue. On the other hand, there is precedent for the IRS cracking down on such formulas, in light of the safe harbor rules which say you can't have a formula that increases as rate of deferral increases. In fact, if I was to argue against such a match formula that is what I would point to, that for effective availability the IRS has said NO to such a formula.

[Guest IU1994]

Tom,

Can you point me to the reg or ruling that says a discretionary rate of match cannot increase as rate of deferrals increase? I understood this to be that case when applied to an enhanced safe harbor matching formula, but does it also apply to a discretionary match? In fact, the 2004 edition of The ERISA Outline Book uses an example of just such an increasing rate of match in example 3.b.1 on page 11.340. I'm confused. Thanks for your help.

[Tom Poje]

there isn't anything per se, as close as you will come is

1.401(a)(4)-4(e)(3)(iii)(F)

right to each rate of match...also treating different rates as existing if they are based of definitions of comp or other requirements that are not substantially the same.

Now, it is generally easier for someone who makes 100,000 to defer a higher percentage than someone who makes only 20,000. that is simply a fact of life.

Can you 'mathematically' prove it? I'd argue if over a 5 year period that only a small percentage of NHCEs defer more than 3% that seems proof enough that effectively you are shutting out the lower paid people. But I think it is a gray area, and unless you have really ticked off the IRS agent it probably wouldn't be an issue. I don't recall anything in the proposed regs, but since they are cracking down on blatantly odd QNEC formulas I am not sure whether I would write a document in which the match % is greater the more you defer.