Different Levels of Match

[jkharvey]

We have a plan that wants to do the "match" as a flat percentage of employee compensation. For example, if you defer even $1.00 you get the 4% of compensation that is being contributed for any participant who defers. It is my understanding that this becomes a BRF and must be tested (410b) as such.

Does anyone have any experience doing this testing?

[Tom Poje]

the way you described it, it sounds like a 4% discretionary nonelective contribution, but based solely on whether you defer.

in other words, you are not matching the deferral at all. without digging into the issue, I know you have a last day rule or hours requirement to receive a nonelective, but I don't believe you can have a requirement 'as long as you defer'.

[david rigby]

What is the point of such design? It does not encourage higher levels of deferral. Why not amend it to match real deferrals, or just make it a safe harbor contribution?

[austin3515]

Why do people want to do anyting they want to do? Maybe I'm crazy, but I thought it was an interesting idea...

[jkharvey]

I agree w/ those of you who wonder why they do this. That was my first comment when it was presented to me. We have tried to convince them NOT to do it this way. We aren't even sure that their current plan document allows for it but that's a separate issue. They are obviously not trying to encourage higher deferrals but they don't want to do a discretionary PS contribution because they would have to give it to more people (ie: those who don't defer) and it becomes more expensive. They want to do the % of compensation contribution but only to those who defer. I don't see a prohibition against it, except that it is now an employer match and because there are different levels of match they now have a BRF subject to 410b.

I have several questions about doing the testing on the BRF. That's the reason I'm looking for someone who has actually dealt with the issue. Anyone?

Thanks

[Tom Poje]

so, for example the HCE makes 200,000 and defers $1.

his match is 8000 so his rate of match is 8000%

doubtful there would be enough NHCEs in the group to pass BRF testing.

ok lets suppose he defers 8000. the match rate is now 100%.

any NHCE that defers more than 4% will receive less than 100% rate so this too could cause plan failure.

and how do you propose to handle someone who doesn't defer? what is their 'rate of match'. Do you have to treat them as includable and not benefiting for coverage and for BRF testing?

is this really just a plot by Dr Evil?

[jkharvey]

Tom,

These are exactly the questions I'm wondering about. What do I do about someone who does not defer? Are they factored into the 410b test of BRF in any way?

If the rate of match for HCEs is only 2% (just picking a number here), and the lowest rate of match for any NHCE is 3% (again, just picking numbers for illustration), would it apass 410 because all the NHCEs have a higher rate of match?

[Guest KennyH]

I am not familiar with the acronym BRF, what is it?

[Tom Poje]

again, that is exactly why i raised such question - I don't think what you suggest is possible.

what it sounds to me is that this is a cleverly disguised 4% nonelective based on whether someone defers.

If it was simply a 4% nonelective to all then it would be a safe harbor nonelective, which can have some requirements, such as entry dates, last dates or hours requirement. (1.401(a)(4)-2(b)(4))

since you now have an additional condition that is not safe harbor (whether the person has deferred or not) you have taken the non-elective out of safe harbor - I suppose if the plan could meet testing under the nonelective rules you might be considered to pass testing - I hadn't considered that possibility.

I would certainly get a determination letter on this one and ask the IRS how they would view such a plan.

In other words, it sounds a lot closer to having a cross tested plan with 2 classes - those that defer and those that don't.

I'd still hold you don't have a match - you are not matching deferrals at all, but rather providing a contribution if someone defers.

[Tom Poje]

BRF- exactly what it says - 'BARF' - more testing (Benefits, Rights and Features)

[jkharvey]

Per Code Section 401(m)(4)(A)(i) A matching contribution means any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee contribution made by such employee, and any employer contribution made to a defined contirbution plan on behalf of an employee on accout of an employee's elective deferral"

I'm saying that this is a matching contribution based on this definition. If I could avoid the matching contribution concept entirely, it would be easier. I could treat it exactly as you described and use cross testing for my nondiscrimination. I don't see how I can do that, however. I think (maybe I'm wrong) that I'm stuck w/ the 401m regulations and that throws me back to the BRF.

The employer has been doing this contribution for a while. I'm not sure (we are waiting to get copies of the prior document) that their document even allows for it. That's going to be an entirely different problem.

[Tom Poje]

1.401(m)-1(a)(2)(ii) adds that it becomes a 'facts and circumstances' as to whether it is a match.

there is no argument that the person received the contribution because he deferred.

The question (at least as I see it) does the contribution in this case actually constitute a 'match'. you aren't really 'matching' anything. as I pointed out, I think I could easily argue this is a 4% nonelective contribution based on an allocation condition 'that someone defers'.

again, in this plan, what 'level' of match exists? there is no level, it is simply a 4% of comp.

I am not saying my argument is necessarily correct, but I would want further guidance from a higher authority