410(b) question

[Kevin C]

2008 calendar year plan. SH match plan to start the year, but SH match was suspended 3/31/08 after proper notice. After the amendment to suspend the SH match, a discretionary match is available for 2008, requiring 1,000 hours and employment on the last day of the year. Two new participants enter the plan 7/1/2008. They complete 1,000 hours in 2008 and are employed on 12/31. No discretionary match is made for 2008 and no forfeitures are allocated. They were not participants while the SH match was in effect, so they get no matching contributions for the year.

Are these two considered as benefiting or not benefiting for the 410(b) test on the 401(m) portion of the plan?

Our valuation software counts them as benefiting, but I'm thinking they should be counted as not benefiting. I don't see them as being directly or indirectly eligible to receive an allocation of matching contributions since there is no match for the portion of the year they were participants.

Anyone else have an opinion?

[jkdoll2]

They would be considered benefiting because they were eligible as of 7/1/08. Even though a match was not made - they are still considered an eligible participant that would be benefiting if a match was made.

It is just like deferrals - if t hey didnt defer they would still be considered benefiting because they were eligible to defer.

I hope that helps

[Kevin C]

I'm not sure it is the same as with deferrals. These two actually did defer starting 7/1. With deferrals, the employee can take an action and receive the contribution. Here, nothing these employees could have done would let them receive a match because there was no match to receive.

[jkdoll2]

I'm not sure it is the same as with deferrals. These two actually did defer starting 7/1. With deferrals, the employee can take an action and receive the contribution. Here, nothing these employees could have done would let them receive a match because there was no match to receive.

I think you are getting confused on what "benefiting" means. It doesn't mean receiving a contribution - is is based on if he is eligible for that source - and they were eligible for the match source. The employee is benefiting is he an eligible employee under the 401(m) plan. See Treas.Reg 1.410(b)-3(a)(2)(i). Or in the ERISA outline book section 8.69

I hope that helps - see attachment from ERISA outline book section4.b. on page 8.69 (I have attached it)

410_b__coverage.pdf

[Kevin C]

Sorry, but no it doesn't help. In paragraph 4.b., it says "An employee is treated as eligible to receive matching contributions even if he doesn't make the contributions required for a match, as long as he would receive the matching contribution had he made such contributions." These employees did defer. There was no match for the portion of the year they were participants. Sal does not discuss the circumstances I outlined.

1.410(b)-3(a)(2)(i) refers you to the eligible employee definition in 1.401(m)-5

Eligible employee --(1) General rule. 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.

I'll rephrase the question. Can they be "directly or indirectly eligible to receive" something that doesn't exist?

[Mike Preston]

I'm with jkolsen on this one. The granularity required under the regulations is annual. And when looking at the annual period, the requirement is that they be eligible for a matching contribution should one be made. Your 7/1 entrants satisfy that definition.

About the only stretch you can possibly worry about in this instance is whether the removal of the SH match provision was discriminatory due to timing. I find it hard to believe it is, but I guess one could conjure up a situation where it could be.

So, the short answer to your latest question is: yes. The medium answer is: Rephrase your question to *had* the employer made a matching contribution would they have received a portion of it?

[PensionPro]

So if a participant is eligible to receive the matching contribution, they are considered benefitting even if the employer decides not to make a matching contribution. This is different from nonelective contributions, where you actually have to receive an allocation to be considered benefitting. It raises a question.

In a 401(k) plan, an employer makes a discretionary match at the end of the year for those participants who deferred, worked 1,000 hours and were employed on the last day of the plan year. In a year when the employer decides not to make a matching contribution, the 410(b) ratio percentage test would be 60% because 40% of the NHCEs terminated during the year after working more than 500 hours.

So this plan fails the 410(b) RPT for the match? How do we correct this?

[Mike Preston]

Correct what?

[BG5150]

So this plan fails the 410(b) RPT for the match? How do we correct this?

If NOBODY gets any match, then NOBODY benefits.

If SOMEBODY gets a match, then you would have to do your coverage test.

[jkdoll2]

The coverage test for 410(b) on the 401(m) part does not have to be ran since there was no match for the year. The ACP test also does not have to be ran. The tests are deemed to pass since there was not a contribution made. But if you ran the test - they would still be considered benefitting. Thanks

[Kevin C]

Ahhh, but if you are right about my question, then the 410(b) test DOES have to be run even if there are no matching contributions made for the year. The exception in 1.410(b)-2(b)(6) is for plans that benefit no highly compensated employees. You are saying the HCE's benefit because they would have received a match if there was one. This plan has HCE's.

We've strayed a bit from my situation, but the issue is the same. Do they benefit if there is no match? If the answer is yes and you change the situation a little, then how do you correct a failed 410(b) test? An -11(g) amendment has to have substance. Changing the eligibility requirements for a contribution that doesn't exist seems short on substance to me.

[austin3515]

People, please.

No one int heir right mind should suggest doing an -11(g) amendment to correct a coverage failure in the match portion of the Plan when there is no match made. that's just ridiculous, and it is NOT the same thing at all.

We'll just argue our way out of it by saying there is no match "plan" if no match is made. No match "plan"= no coverage test.

[Kevin C]

I agree that it gets strange if there is no match for the entire year. But, the regulations clearly say the exception is for plans with no HCE's benefiting. I don't see a 410(b) exception that applies to the 401(m) portion of the plan when no match is made, but an HCE benefits. I think that situation supports an interpretation that no match being made means not benefiting.

The issue I have to deal with is tied to the 410(b) rules, but my problem isn't with 410(b). My main concern here is ACP testing. The solution to the 410(b) question determines whether or not these two are included in the ACP test.

[Tom Poje]

so Austin, you put in an -11g amendment that changes the hours requirement (for this year only) to no hours and no last day provision. now you pass coverage, but have to give all these people effected by the amendment the same match as everyone else received, which was nothing????

[Guest Sieve]

I can't dismiss Kevin's argument out of hand, as some might. But, I'd agree that there is no 410(b) test necessary if there is not, in fact, any contribution of a specific source. Thus, if no discretionary PS is made to a plan but a discretionary match is, then you perform 410(b) testing for the match but not for the PS.

I think, technically, that Kevin is correct that there is no exception to the 401(m) match eligibility rule if no match is actually made. But, 410(b) is a test of eligibility non-discrimination, and 410(b) ought not test for eligibility discrimination if there is no contribution/allocation (to anyone) with respect to which potential eligibility discrimination may have occurred. This is clear from the pre-401(k) coverage rules of 410(b), which require that there actually be an allocation in order to be required to perform the test. The 401(k)/401(m) eligibility exception--i.e., not actually receiving a match or making a deferral does not cause that individual to count against the test--is just a rule that applies only if, in the first instance, the test is necessary (i.e., if someone literally benefited, in the traditional sense, from the match or deferral).

However, there is a different scenario here, because a match was made during the year (albeit not for the entire year), and therefore 410(b) coverage for the 401(m) portion of the plan must be tested. So, it seems to me, those who entered 7/1 are treated as benefiting in the match (pursuant to Reg. Section 410(b)-3(a)(2)(i)) because there was a match during the year--but then it may all come out in the wash because those individuals also must be 0% in the ACP test (since the mid-year elimination of the SH match requries ACP to be passed for the entire year).

That being said, I think Mike Preston's suggestion re: a potentially discriminatory amendment--i.e., that a mid-year amendment to eliminate the SH match and replace it with a discretionary match which then is not made, might be a discriminatory amendment--may have some merit in certain cases, and may be the way to get to Kevin's result where a mid-year amendment causes a significant percentage of NHCEs (& no HCEs) to be prevented from receiving the promised match for the remainder of the year as a result of the addition of end-of-year conditions.

[buckaroo]

This is a very interesting question.

On one hand I think you could consider them benefiting and include them in your ACP and 410(b) testing. (This would be based on the fact that if a discretionary match was made, they would benefit from it.)

On the other hand, you could consider them not benefiting and do not include them in your ADP testing and in 410(b) testing as non-benefiting non-excludable. This would alleviate the burden of the ACP testing, but may cause an issue with the coverage testing.

1) If they are included as non-benefiting non-excludable, does this 401(m) portion fail the 410(b) testing?

2) If they are included as benefiting, does the ACP fail?

If they pass both ways, I would simply note it and move on.

One final “far out” thought: If you consider them benefiting, you may have some folks benefiting at the level of the SH match contribution and some benefiting at 0 (even though they made 401(k) deferrals and completed the allocation requirements for the discretionary match). In this case, you may need to consider BRF testing as you now essentially have a two tiered match. One as the SH match for the first three months of the year and the second as 0% of 0%. I am not sure this is valid but thought it was worth mentioning.

[austin3515]

so Austin, you put in an -11g amendment that changes the hours requirement (for this year only) to no hours and no last day provision. now you pass coverage, but have to give all these people effected by the amendment the same match as everyone else received, which was nothing????

I was suggesting that to do such a thing would be ridiculous... So it sounds like you agree with me - no match, no coverage, no ADP test?

[Guest Sieve]

Why not an ACP test? You're not SH anymore, so you have an ACP for the entire year.

So, if there's an ACP test, it really doesn't answer your OP. Should these 2 be part of that ACP test? I think you'd say No--but, if that's true, then wouldn't those 2 then have to be treated as not benefitting, and so count against you as part of the 410(b) test for the year? On the other hand, I'd say Yes--free pass for 410(b), but inlcuede those 2 in the ACP test. Buckaroo says maybe--but I like his either/or approach: try it both ways, and, if both scenarios pass, you're OK.