Conditional Employer Match

[Guest Tom Moses]

This may be more of a 404© issue, but here goes: Can an employer require that elective deferrals be invested in Company Stock in order to be matched?

[Guest Beavis]

I don't think that this is a 404© issue. Starting 1/1/99, there is a prohibition from employers forcing more than 10% of salary deferrals into securities of the employer. Check out erisa sections 407(a)(2) and 407(B)(2).

I believe the jist of these sections is that employees could elect to invest more than 10% of their deferrals into ER stock if they wanted, but the trustee can't direct the invesetments in that fashion.

I think that making a match contingent on investing deferrals in employer stock would be tantamount to taking away the participants' right to not invest in employer securities.

I'd certainly entertain other opinions on the subject though.

[MWeddell]

I don't think conditioning the match on whether the employee makes elective deferrals into company stock is tantamount to requiring it. At the very least, in the absence of any IRS regulations so far on the company stock and company real property prohibition added by TRA'97, it's a reasonable interpretation of the statute to not prohibit this practice. An alternate is to make the portion of the plan consisting of contributions going into the company stock fund an ESOP.

[Guest Destruo]

Does anyone have a concern regarding whether or not this conditional contribution violates the "contingent benefit rule" under 401(k)(4)(A)?

This section basically says that a CODA will not be qualified if benefits other than matching contributions are directly or indirectly contingent on an employee's electing to make deferrals. Granted that matching contributions are exempt from the contingent benefit rule.

However, this begs the question of whether or not such conditional contribution meets the definition of a "matching contribution." IR Reg. 1.401(m)-1(f)(12)(i) & (ii) states that:

(i) a matching contribution is one made by the employer "on behalf of an employee on account of an employee's elective deferral."

(It seems that adding the additional requirement that the contribution be invested in employer stock removes the contribution from this limited definition of a match.) Also,

(ii) Employer contributions made on account of employee or elective contributions. For purposes of paragraph (f)(12)(i) of this section, whether an employer contribution is made on account of an employee contribution or an elective contribution is determined on the basis of all relevant facts and circumstances, including the relationship between the employer contribution and employee actions outside the plan.

Is this a concern? Looking for input...

Oscar