First Match ACP testing requirements

[Stevo-PDX]

I'm curious to see if anyone takes what I perceive as the more aggressive stance on this...

Suppose a plan has been in existance since 2003 with 401k and match provisions, but has never made a match contribution. Begining with 2005 or 2006, the employer would like to make a match contribution.

Would anyone take the stance that the first year they make the match contribution triggers the assumed 3% prior year NHC ACP or is the plan required to switch to current year testing if the employer wants the HCE's to get any match the first year? Of course, that puts them on the minimum 5 year route for current year testing.

Thanks,

Steve

[Leopurrd]

I don't think its an aggressive stance - I believe it is not allowed per the IRS regulations. Sal has mentioned this in his ERISA outline guide.

FWIW, when we encounter this, we change the testing method to current. Can't wait until the EGTRRA restatements, I've heard with the new prototypes you won't have to use the same testing method for both deferral and match.

We found out about this not too long ago and have since changed our document drafting style to not include a match unless the ER will be making one the first year. We then amend the plan to add the match the first year they decide to contribute and you can then use the 3% rule/prior year testing.

Vicki

[Stevo-PDX]

Vicki, I certainly agree with you on this, particularly with drafting the document w/o the match provision until it's needed.

Thanks.

[MWeddell]

I agree that it's safer to not include provisions for matching contributions in the plan until they are actually funded so that one can still use the deemed 3% rule for the prior year NHCE ACP the first plan year the match is funded. However, is it definitely wrong?

First, let's assume that the plan doesn't permit employee after-tax contributions and that the plan is not a successor plan. Furthermore, assume the plan provides for using the prior year testing method for ACP testing.

Suppose the plan has provisions for the match but only if the employer determines to make a matching contribution for the year. The issue is when is "the first plan year in which the plan provides for ... matching contributions" as that phrase is used in Treas. Reg. 1.401(m)-2(c )(2)(ii). There are no examples in the regulations illustrating this regulation. Might it be reasonable to interpret this situation as the plan itself provides for matching contributions only if the employer decides to fund them? I think that's a reasonable interpretation.

This certainly is an aggressive position (probably any time one contradicts Tripodi's ERISA Outline Book it has to be considered aggressive), but one that still strikes me as a reasonable interpretation.

[Leopurrd]

Steve, glad to hear someone out there agrees with me

MWeddell - you bring up an interesting point. But, since I am not a lawyer, I usually follow the interpretation in Sal's books. If you find anything definite - please update me! We've had several clients in this position and it would be great to offer them another alternative besides an NHCE only match.

Thanks to both of you!

Vicki

[MWeddell]

Nothing more definite than the regulation I cited. I'm unaware of any written IRS guidance interpreting it more specifically.

I would think a client would more readily agree to switching to current year testing than to not allocate any match during the first year that the match is funded to highly compensated employees.