Match formulas

[Guest Peggy806]

I have one employer who does not want to start the match on someone until they make at least a 4% deferral. Where is the site that says they can't do that? Basically, it would be a zero percent match on the first 3.99%, then they start matching. I know you can't increase the match as deferrals increase, but I'm not sure of where to find that in the regs.

thanks

[austin3515]

I know you can't increase the match as deferrals increase, but I'm not sure of where to find that in the regs

Yes you can, you can only not do this in an ACP safe harbor - 401(k) (1.401(m)-3(d)(2).

Basically, it would be a zero percent match on the first 3.99%, then they start matching

Since the rule stated above applies only to safe harbor plans, the implication is that you CAN have increasing rates for non-safe harbor plans.

NOW, accoridng to the 410(b) regs an employee is treated as benefitting if they are treated as an eligible employee under 1.401(m)-5, which defines an eligible employee this way:

Eligible employee means an employee who is directly or indirectly eligible to make an employee contribution or to receive an allocation of matching contributions (including matching contributions derived from forfeitures) under the plan for all or a portion of the plan year. For example, if an employee must perform purely ministerial or mechanical acts (e.g., formal

application for participation or consent to payroll withholding) in order to be eligible to make an employee contribution for a plan year, the employee is an eligible employee for the plan year without regard to whether the employee performs these acts.

Since deferring 4% is not a purely ministerial act, I'd say you have a coverage issue, and this a no go unless you can demonstrate it passes coverage.

Of course, if at the end of the year you fail coverage, you can amend the plan to pass coverage, except that such an amendment needs to be the exception, and quite frankly, I just don't see how this is not going to present a problem since anyone not deferring at all would have to be treated as not benefitting.

[Tom Poje]

arguably under 1.401(a)(4)-4(e)(3)(iii)(G) you may also have a BRF issue as well -the right to make each rate of matching contributions....

does everyone have a 'current availability'? yes, beacuse you are "not" [(forgive my typo for omitting the word 'not'] preventing anyone from deferring enough to get a match.

does everyone have an 'effective availibility'? arguably no, since the economy may dictate someone's ability not to defer 4%. based on facts and circumstances, does the formula favor HCEs?

[Guest Sieve]

austin -- Are you saying, in that instance, that those deferring less than 4% are not covered under the 401(m) "plan"? If that's correct, but if the plan nevertheless passes coverage, then those individuals would not be included in ACP testing, correct? If that's the result, then your analysis just can't be right . . .

If, in a hypothetical plan, deferrals are in whole percentages only, would you say that for 410(b) purposes those who defer nothing are not eligible for the 401(m) plan and it must be tested for coverage because deferring 1% is not a ministerial act? What if there's no percentage or dollar limitation, but someone doesn't defer even $1 and therefore does not receive a match? I would say that the act of deferring anything at all is not ministerial, but if you would get a match for deferring then you are eligible for the match under 410(b) even if you defer nothing. Why? Because you would be "indirectly eligible . . . to receive an allocation of matching contributions". How else could it work? If it didn't work that way, then there would never be a 0% in the ACP test--and all 401(m) "plans" would have to be tested for minimum coverage by excluding those who defer nothing, but that's not the way it works.

Tom -- I would agree that there's a BRF issue in this instance, but don't you think there is "effective availability" at a 4% level since the regs permit an auto enrollment "qualified percentage" under a QACA to be as high as 10%? In any event, couldn't you test for non-discrimination by restructuring under Treas. Reg. Section 1.401(a)(4)-9©, since that also applies to BRFs (-9©(2))? You could then see if the 4% match level meets 401(a)(4) by applying the ratio percentage test to that specific restructured plan (-9©(3)(i) and -9©(4)).

[austin3515]

Since every plan I've ever seen a document that didn't require whole percentages, apparantely everyone on the planet agrees that requiring a minimum deferral of at least 1% does not create something beyond a ministerial act. In fact the basis for limiting deferrals to whole percentages is perfectly reasonable in my opinion, since it improves the odds of accuracy and the difference between 3% and 3.5% is miniscule.

LEave them out of the ACP test? Let's admit we're in bizaaro world witht his plan design in the first place. So if by some stroke of incredible coincidence, this plan was able to pass coverage, I dare not be so bold as exclude all those zeroes from the ACP test.

So just out of curiousity, are you taking the position that these people WOULD be benefitting, and that deferring 4% is purely ministerial? Remember, the individuals deferring 2% DID complete an enrollment form, but are not getting the match... At a minimum, I would consider the 4% deferral requirement an additional allocation condition, which again would suggest a coverage problem.

I too agree that there is a BRF issue, but I think the coverage issue is paramount.

[Tom Poje]

Sieve-

you raise an interesting point that auto-enroll could start at 4% and conceivably be as high as 10%.

If I remember, someone asked that question at an ASPPA conference and I think the IRS response was something to the effect that "they would know an abuse if they came across it".

[Guest Sieve]

austin --

Yes, that's the position I'm taking. I may be wrong, but that's my position at this time.

But I still don't understand one part of your position. Please explain to me how you can use the 1.401(m)-5 definition of "eligible employee" and consider these <4% salary deferral participants as not benefiting under the 401(m) portion of the plan (pursuant to Treas. Reg. Section 410(b)-3(a)(2)(i)) specifically because they are not "eligible employees" pursuant to that definition, but then use that same definition for ACP purposes and consider these individuals in the ACP test because they are "eligible employees" (Treas. Reg. Section 401(m)-2(a)(1)).

Seems to me that they either are eligible or they aren't, and 410(b) and ACP will then fall as they will: if they ARE eligible, then they are benefitting under 410(b) & are in the ACP test, but if the are NOT eligible then they are not benefiting and are not in the ACP test. Am I missing something?

Tom -- I think I'd still make the argument that we meet effective availability.

[austin3515]

It is not lost on me that not benefitting for 410(b) = excluded from ACP. So let's then go with including them in the ACP test, since that what a literal interpretation would require. What's more, the plan does pass coverage by treating them as not benefitting. So I'm now OK with leaving them out of the ACP test.

I guess my position comes back to what it means to have a purely ministerial requirement in order to be eligible for the match. Since the reg offers the example of "simply handing in an enrollment form", my opinion is that mandating a minimum 4% contribution presents a coverage issue. And THIS is the crux of what I think about this.

SO, you think mandating a minimum 4% contribution DOES fall into the "ministerial" requirement definition, which would allow them to be treated as benefitting. So I guess we won't agree...

Oh well!!

[Guest Sieve]

austin --

Rightly or wrongly, I'm not focusing on the ministerial aspect of the definition. I think the ministerial issue is a way for the regs to say that, once someone is "directly or indirectly" eligible for a match, you can't take them out of the ACP test just because they also have to elect to defer on a form and did not fill out the form, or because they also were required to schedule an appointment to meet with an investment advisor to select their investment options and did not make the appointment. These are ministerial tasks, and they do not cause someone NOT to be considered eligible (& therefore not be considered in the ACP test) if that person otherwise is, in fact, eligible under the terms of the plan. So the initial inquiry is whether there is direct or indirect eligibility, and a ministerial task doesn't change that result.

Obviously, what I'm focusing on is the "directly or indirectly" language of the regs. For example, not yet meeting the plan's eligibility requirements or not being in Division A (the only employees eligible for the match) certainly takes that individual out of the regs' definition of eligible employee, but I'm not convinced that making too small a deferral does. The reason, frankly, is because I can see a plan passing 410(b) and then easily passing ACP by excluding those at <4% deferral (in the OP), and I just don't think that's what the IRS wants to see.

That being said, I will agree that your latest statement that the 4% deferral (in order to receive the match) may, in fact, be another eligibility requirement--so that an individual deferring <4% therefore might not be "directly or indirectly" eligible for a match since he/she does not meet that additional eligibility requirement--does ring true with me. I just don't like the idea of therefore keeping those individuals out of the ACP test (or, if deferrals of <4% were not permitted, leaving those individuals out of the ADP test). But, putting it into the context of eligibility for the match, I see your side much clearer.

I guess that the conservative thing to do, as you suggest, would be to require that a plan pass both minimum coverage (by considering those individuals as not benefiting) and ACP (by considering those individuals as benefiting)--and cross your fingers that both tests pass! And, of course, then you have to deal with the implications of the BRF issue. Perhaps the other (better?) option, of course, is to stay far away from this type of plan design altogether!!

[austin3515]

Perhaps the other (better?) option, of course, is to stay far away from this type of plan design altogether!!

Ain't that the truth...

[PLAN MAN]

Help me out here, I'm having difficulty following the plan design. Does the plan have any actual restrictions on who is eligible to receive a matching contribution? In other words, are all employees eligible to defer also eligible to receive a match? Or, does the plan say to be eligible to receive a matching contribution, a participant must defer at least 4%? This should determine who is included as eligible for 410(b) testing. If everyone who can defer is eligile for a match, then coverage is passed and the ACP test includes them all, with the required zero percentages. If only eligible with a 4% deferral, then coverage must be tested and passed before the ACP test. Here's a thought, how do you handle a participant who elects to defer 4% at the beginning of the plan year, but stops during the year so their annual deferral rate is less than 4%, when the match is earned each payroll period?

Now on to the match, how is the matching contribution formula stated in the plan? Discretionary or a fixd tier formula? Either way, is the formula stated similar to 0% on less than 4% deferrals and 100% on deferrals of 4% or greater? The ACP test is used to determine if the matching formula is discriminary.

[jpod]

Is this design subject to regular 410b testing or is it subject to "benefits, rights or features" testing under the 401a4 regulation?

[Guest Sieve]

You might want to read this entire thread for the earlier discussion of 401(a)(4) vs. 410(b) and then add your comments.

[buckaroo]

All:

This is a very interesting thread and pertains to an issue that I am currently detaling with. (However, I believe that mine is a bit easier.) I have a plan that provides a match to all participants on a payroll basis. At the end of the year, they "true-up" the mach for ONLY those who are actively employed on the last day of the year. The client believes that they are due two spearate coverage tests for the two different matches: One for the payroll-by payroll match and one for the people who also receive the true-up. My thought process is that there is only one match for the 401(m) portion of the plan, everyone is benefitting (100% coverage). Agree/Disagree?

I also beleive that my situation is clearly a benefits rights and features issue. Therefore, I would need to calculate the number of participants (split between HCEs and NHCEs) who are eligible for the "true-up" contribution and calculate the availability ratio for the populaitons and detrermine if it is great enough to exceed the safe harbor percentage. Agree/Disagree?

Please provide details. Any thoughts are greatly appreciated.

[Bird]

I'd be curious to see the document language that has different allocation requirements for the payroll match and the true up. I'd worry about whether that's being done right first.

[buckaroo]

I'd be curious to see the document language that has different allocation requirements for the payroll match and the true up. I'd worry about whether that's being done right first.

I agree with you. I had read the doc and this is what it says (Not word for word): I took a look at the document and it states that a match will be made for all. It then says that an additional match will be made to true-up those participants who are actively employed on the last day of the year or have term'd due to ddeath disab., retirement.

I know that it says additional match, but it all still falls into 401(m) and therefore coverage is met as all are benefitting. This is why I beleive it to me BRF.

[Bird]

Interesting. I'd think it would take a lot of words to 'splain that allocation in a definitely determinable way. Does it have an approval letter?

Anyway, I'm inclined to agree with you; one 410(b) test for the match, and BRF on the extra.

[justatester]

Hi,

This is a very interesting thread....I have a very similar situation.

Everyone is the plan receives a base match of 150% of 1 and 50% of the next 4%.

There are two additional matching formalus for other groups: one gets an additional 2.5% of compensation if deferring at least 3%. The other one gets 7% of comp if deferring at least 3%.

So, I don't believe I have a coverage issues since everyone is entitled to the base match. I do believe I may have a BRF issue.

When I am breaking down my subgroups, the first group is the one who is actually receiving receiving the additional 7%, second group is the parts receiving 2.5%, and the third would be everyone else.

Does that make sense?

[Tom Poje]

if I understand your description, you would have for BRF testing:

the third group is all people since all receive the base match of 150% of 1 and 50% of the next 4%.

the second group are those who get at least 2.5% additional (so this includes those at the 7% additional level as well since they received at least 2.5% extra )

from your description, it sounds like people are in the different groups, so whether they take advantage of being in the group is not so important?

[justatester]

Ok, so would I be double/triple counting people. For the group that receives the 7%--they actually receive the base, plus the 2.5, plus 4.5%.

For example, someone who receives the base, plus the 2.5%, plus the 4.5%, would be counted in all three levels?

[Tom Poje]

yes, because the rules (putting it in rather simplistic terms)

count anyone who received 'at least at this level...'

[justatester]

another follow up question....

Since you have to defer at least 3% to receive the additional match, how do I count those participants who would have been eligible had they deferred 3%.

Also, if the most generous match the additional 4.5%, fails how do I fix the problem....based on my numbers, I need 1 additional NHCE to receive the match, can the client amend the plan now to allow for a handful of additional NHCEs to receive the match?

[Tom Poje]

technically if anyone in a plan could defer 5% or 10% or whatever to get the extra match, then option 'currently' availability to all.

but a plan must both current availability and effective availability. This exciting and breathtaking nondiscrimination feature is described in greater detail under 1.401(a)(4)-4. but why wait for the movie when you can read up for it on your own....

how do you prove effectively availability when its a facts and circumstance test? I'd think you would say an extra match above 10% is too high, but at point do you say the % is okay? if all the NHCEs are minimum wage, then that would be another factor to consider, etc.

as for fixing a problem, 1.401(a)(4)-11(g) describe corrective amendments