Discriminatory rate of match as it relates to 415 testing

[Guest Kelly R]

3 HCEs have $34,000 in contributions including $10,000 in elective deferrals & $9,600 match (match formula is 100% up to 6% comp). After returning $4,000 4k to pass 415 testing, discriminatory rate of match exists. Do regs allow returning less 4k to maximize match. For example, return $2,200 4k & $1,800 match, resulting in $7,800 allowable for each 4k & match. If regs allow, is it still a document issue?

[Tom Poje]

I think what happens is as follows:

If you return $4000 in deferrals, then the match related to the deferrals would be forfeited to all others. since the HCEs are at the limit, they could not receive the forfeitures.

The alternative would be to return $2200 in deferral. The $1800 in match is left in the plan and treated as a match for next year. For all practical purposes ee receiced 7800 in match, and you have already deposited match money for next year match.

It appears you could also simply treat $4000 in match as applied toward next year's match. In other words, ee only received 5600 in match this year. (see 1.415-6(B)(6)(ii) I think their is no discriminatory rate of match in the current year because 415 limit overrides. (ee would have gotten 100% rate if not for 415 limit)

[MWeddell]

I agree with most of the above post by Tom Poje, but would add the caution to look at your plan document. IRS Announcement 95-33 (the 415 audit guidelines) indicates that plans should indicate which optional 415 correction methods they have to meet the definitely determinable allocation formula requirement. I've seen many plans receive favorable determination letters without being drafted in that way, but look at your plan document. It may not allow you to pick and choose among the various correction alternatives.