Benefits Rights and Features

[Guest cxs]

A Plan matches the first 4% of deferrals at 25%. The next 2% (up to 6% deferrals) are matched at 100%. Does this Plan need to be tested for Benefits Rights and Features? After all, everyone can defer up to 6% if they want do.

Can the BRF test be done on a disaggregated (otherwise excludible) basis?

How is the test corrected if it fails? Do additional match contributions

need to me made to NHCEs?

Thanks!

[Tom Poje]

ah, an example of the difference between 'current availability' and 'effective availability'.

yoor observation is correct, everyone can defer up to 6% if they want.

but effectively how many NHCE can afford to do that? it becomes a fact and circumstances test. I'd be really concerned if none of the NHCEs defer more tan 4%, but there are no hard and fast rules.

how much does the govt like formulas like this? well, take a look at safe harbor 401k formulas. the match % can not increase as the rate of deferrals increase.

[Guest cxs]

ah, an example of the difference between 'current availability' and 'effective availability'.

yoor observation is correct, everyone can defer up to 6% if they want.

but effectively how many NHCE can afford to do that? it becomes a fact and circumstances test. I'd be really concerned if none of the NHCEs defer more tan 4%, but there are no hard and fast rules.

how much does the govt like formulas like this? well, take a look at safe harbor 401k formulas. the match % can not increase as the rate of deferrals increase.

[MWeddell]

I think this is legal.

Tom Poje is right that it still must pass the subjective effective availability rule, but it's hard for me to see circumstances in which one couldn't defend the effective availability. Might still be something you want to warn your client about.

One could interpret the safe harbor rule as creating a negative inference that for non-safe harbor matches one can have match rates that increase as an eligible employee defers greater percentages of pay.

[Tom Poje]

oh, and there is certainly nothing I know of to prevent you from testing otherwise excludables separately.

looking at the situation, I would expect if you were to 'fail BRF' you would fail ACP test, which implies possible poor plan design.

[MWeddell]

Here's a more complete response to this question (I just fielded a nearly identical question internally within my firm):

I have heard some argue that this is may be a discriminatory benefit, right, or feature because it may fail to satisfy the effective availability requirement of Treas. Reg. 1.401(a)(4)-4©. I don't think that argument holds water, but you should at least be aware the fact that others' opinion differs from mine.

First, of all, each match rate is a separate BRF subject to testing, so the BRF issue of whether the 100% match on deferrals between 5% and 6% of pay is theoretically the same regardless of whether the match is backloaded in your example or something simpler like a 100% match on deferrals up to the first 6% of pay. Either all matches on up to 6% of pay are discriminatory BRFs or none of them are. To me, this tends to show that none of the matches are discriminatory BRFs.

Second, the argument that the match is not effectively available to NHCEs because they can't as easily afford to defer 6% of pay falls well short of the three examples in Treas. Reg. 1.401(a)(4)-4©. Examples 1 and 3 involve BRFs where it was impossible for NHCEs to get the BRF in question, not just economically more difficult for them to do so. Example 2 involves a BRF available for only 2 weeks that wasn't publicized to NHCEs. None of the examples hint that the effective availability requirement could stretch this far.

If there's a discrimination problem with the match formula, it's one that the 401(m) test is designed to handle. It's a problem with how the match is likely to be used, not an availability issue.

[Guest cxs]

Thank you!