Match contribution with no definite formula

[Guest At Peace]

I have a client who made Match contributions to all employees who defer. The rate of match was 6% of salary - regardless of the rate of deferral. (Basically, a 6% Profit Sharing to only those who defer). 2003 was first year for the plan.

(These are segregated accounts, identified by money source. I would like to avoid moving money around and leave the money as a Match since they made monthly deposits - and the intent was for it to be a Match anyway.)

My first thought is that this is discriminatory - those who defer a higher percent received a lower of match. (example: 3% deferrees received a match of 200%, whereas 5% deferrees received a match of 120%.)

The ACP passes, therefore I believe that 401(a)4 is satisfied. As it turns out, the HCEs are receiving the lesser rate since they deferred a higher percentage.

There are posts of this nature on the Message Boards dated back in 2001, but no definite opinions on this matter.

What I would like to do is "back into" a match formula that will work for 2003 and 2004 - if I can come up with one. Document states match is discretionary.

Any one have an opinion on how to handle this situation? Do you agree that if ACP passes, no additional testing is needed and it can be left as a Match?

Thanks for your insight!

[jquazza]

If you think it's discriminatory, then every time you have a match based on a capped deferrals (i.e. 100% of first 6%) you would be discriminating.

A formula that would work to achieve your result would be 600% of the first 1% (assuming no one deferred less than 1%, or 6,000% of first .1%)

[WDIK]

My question would be, "Why doesn't every employee defer a few cents and get a 6% bonus?"

[GBurns]

That is what many employees do in such plans.

[Bird]

jquazza has a good formula that works...but I doubt that it follows the terms of the document.

That is, unless the document specifically caps the matched % at 1% (or .1%) I think your match has to be in proportion to total deferrals.

I know some disagree, saying that "discretionary" means you can arbitrarily cap the matched deferral %, but I don't think so. Obviously, the employer thought "discretionary" means "I can do whatever I want."

I'm of the opinion that it is too late to change the '03 formula, and monies should be reallocated. It may or may not be too late for '04, depending on whether or not the plan has a last day requirement to get a match.

[Guest hyper]

I believe alot depends on what was communicated to employees. The SPD should include the method by which the amount of the contribution is calculated. You may say the matching contribution itself is discretionary but the method of allocating the matching contribution should be provided to the EE's in the SPD. For example, a comp to comp allocation. What was communicated to EE's?

[MWeddell]

Assuming that this complies with the plan document, I don't see any problem at all.

In 1.401(a)(4)-2, it's clear that a flat dollar amount or a flat percentage of 414(s) compensation is not discriminatory. The rules for testing whether a rate of match is a discriminatory benefit, right, or feature under 1.401(a)(4)-4 are less well-defined but there's no way that the IRS could challenge a flat dollar match as discriminatory.

[Brenda Wren]

I had this exact scenario occur on a case we consulted on a few years ago that was being audited by the DOL. At the time I had a relationship with the local IRS auditor. The biggest concern to me was that the terms of the plan had not been followed. The IRS auditor (he was not involved; I just asked him anonymously of his opinion) said that if the case was referred to their office, the likely correction would be a 6% contribution to everyone, not just those that deferred. The logic was that the contribution was really a profit-sharing contribution, not a match. However, the DOL was auditing for different reasons and didn't care much so the case was never referred to the IRS.

My two cents for what it's worth!

[WDIK]

That is what many employees do in such plans.

Precisely. So why not just give a 6% profit sharing contribution to everyone (as Brenda's IRS friend recommended) and avoid the testing issues?