Service based allocation

[Guest Moira]

An employer (sponsoring a qualified 401(k) plan) wishes to replicate the contribution allocation provisions of a state-sponsored 457 plan by increasing the amount of matching contribution available to employees with longer service, as follows:

If the employee has 0-9 years of service and defer 3% they get 3% employer profit sharing, and 1.5% employer match (this is the maximum employer contribution).

If an employees has ten years of service or more, the match would work as follows:

Employee Deferral 3% Employer Profit Sharing 3% Employer match 2%

Employee Deferral 5% Employer Profit Sharing 3% Employer match 3%

Employee Deferral 7% Employer Profit Sharing 3% Employer match 4%

Isn't this a discriminatory contribution formula and, therefore, not allowable in a qualified plan? I thought the rate of match was not allowed to increase as the deferral rate increases or is that just a safe harbor thing?

Thanks in advance for your thoughts.

[Just Me]

I have seen this type of chart before, and on its face it looks discriminatory, but let's look at what's REALLY being given:

Defer 3%, get a 66.67% match

Defer 5 %, get a 60% match

Defer 7%, get a 57% match

The matching RATE is dropping as the deferral rate goes up. Doesn't look discriminatory to me.

Also, is the 3% profit sharing contingent on the employee making a deferral? If so, it's treated as additional matching contribution and needs to be part of the testing as such.

[Guest RJF]

If it doesn't benefit any HCE's, then I don't see any problems

[Tom Poje]

I believe you have a BRF issue on the service issue. those with less than 10 years and those with more than 9 years.

if the only people with 10 years or more service are HCE you will fail. even if you have some NHCEs you could still fail.

see 1.401(a)(4)-4(e)(3)(iii)(G) 'the right to each rate of match'

[Guest Moira]

Thanks again for your thoughts. The plan has no HCEs, so looks like it's something they can do. As for the design of the matching allocation in the document - any thoughts? I am suggesting they just use a discretionary matching formula and then reference an addendum which illustrates the match. I don't see how a points-based formula could work.

Any other suggestions? Thanks so much, I so appreciate having the variety of opinions and experiences to tap into here.