401(k) plan design issue

[pbarrett]

We are looking at a takeover plan401(k) plan.

It has a match formula that is tied to the medical insurance program. The document simply says the match is discretionary (no details).

Here are the facts- small business owner is short on cash for all benefits. He decides to match the deferrals based on how much he pays for the employees' insurance premiums. If the participant's monthly premium is less than $100 per month, he matches $1 to $ up to 8% of comp. If the premium is over $100 per month, he matches $1 to $1 up to 5% of comp.

Is there a problem with this? There are no highlys in the plan.

Do the document need to spell the formula out?

Appreciate any help here.

Pat

[austin3515]

1) According to my reading of the regs, you wouldn't run ACP testing on a match unless the match is on account of elective deferrals, which in my opinion, relates exclusively to elective deferrals under 401(k) (i.e., not under 125). So what you describe is not a "match" as defined by the regulations. You might be able to call it a profit sharing contribution, subject to general nondiscrimination testing of 401(a)(4). Of course, the plan must specify this allocation, which it sounds like yours does not. But if it did, b/c you have no HCE's, it should pass the test.

2) You indicated that the plan does not specify allocation of the match. I suspect the case is that there are two different sections-one spells out the AMOUNT of the contriubtion, and the other spells out the ALLOCATION of those contriubtions. 99 times out of 100, this will be the very next section.

3) So assuming one and 2 are correct, here is what happens: your client is making matching contributions to the plan, but allocating them incorrectly (i.e., based on health insurance premiums, and not elective deferrals).

The fact that there are no HCE's does not help with the problems you have.

[Guest TGeer]

I read the initial post to mean the rate of match is based on the health insurance cost for the employee, but the rate is then applied to deferrals up to a limit. If there are no HCEs in the plan, testing doesn't matter, so the issue is whether (1) the plan terms allow the strcture, and (2) whether any other law is violated.

Any plan covering this structure would be either an indicidually designed plan or a minor modifier of a pre-approved plan text. The note by Austin3515 is exactly on point on whereto find the relevant language. Failure to administer a plan in compliance with its terms raises the risk of employee lawsuits (and easy to win lawsuits here) and of disqualification. In your shoes, I would want to make sure the plan allows the allocation or require a new document, plus send them a letter saying you take no responsibility for this issue as to periods before takeover.

Whether this arrangement causes any problems with the health insurance or 125 I leave to others, as those issues are out of my area (but worry about the fact that the implicit extra cost to get family coverage discriminates against folks with families, which no court is going to like).