Need reality check - mulitple matching schedules allowed if testing passed?

[ERISAatty]

I have just discovered that a client's 401(k) (with matching contribtion) provides:

1. A basic matching formula (up to 2% of employee's comp per year, if they are deferring at least 4% into plan), and

2. (for certain employees who transferred in under a reorganization): an Enhanced Matching formula that works on a graded schedule so that the maximum match amount is obtained after nine (9) years. The first year percentage is 0%, however, and the amounts increase thereafter.

I have found a problem with the terms that relate to rehired employees. Specifically, whoever drafted this Enhanced Matching formula also provided that "a Participant's period of service prior to his or her reimployment commencement date will not count for purposes of determining the Participant's employer matching contruction under the enhanced foumula (only such Particpant's period of service following his or her reemployment commencement date will count for puposes of determining the participant's employer matching contribution under the enhanced formula)."

(Plan uses elapsed time method of counting service).

The way I read IRC 410(a)(1)(A), so long as a rehired employee previously completed at least one year of service, then when rehired (unless they were 0% vested, made no elective deferrals, and at least five years have passed), they are immediately eligible to participate again.

Employer's practice has been to reenter rehires at the 0% match level - although rehires are immediately eligible for elective deferrals.

Having to reenter the 'enhanced match formula' and earn 0% for the first year of rehire seems a problem to me. I've told client that they can't do this, and that a rehired employee must at least qualify for the next highest level of match that is not zero.

Although it seems to me that the rehired person should be credited with to appropriate years of service (five, for example) and earn the corresponding (i.e. five-year level) match amount on rehire, do you all agree that there could, alternately, be a separate, less rich match formula only for rehires so long as they pass if they pass ACP testing, and as long as the rehires with at least one year of prior service get more than a "0% match" in the first year after rehire?

Thank you in advance for any guidance. This one has had me stumped. (I also realize that we may need to correct and make up for any rehire who should have gotten a higher match and didn't, after we identify who those people are).

Thanks!

[ERISAatty]

OK, I found some earlier threads

(see, e.g. http://benefitslink.com/boards/index.php?s...ent+match\ )

discussing the topic of a graded or non-uniform match formula, and now feel pretty comfortable that it's possible so long as ACP and 401(a)(4) are satisfied.

I also feel sure that the rehired employees who previously had one year of service can't be put back into the 0% match category. They should either go back into the appropriate match 'grade' for their earned years of service, or into the basic match group, or into yet another level of match, if the employer is willing to have that new group tested, as well.