Match of more than 100%

[CJS07]

Can a plan utilize a discretionary match formula that matches more than 100% of deferrals and caps the match at X percent? Example match 125% of the first 2% deferred?

[401king]

Can a plan utilize a discretionary match formula that matches more than 100% of deferrals and caps the match at X percent? Example match 125% of the first 2% deferred?

Yes. Discretionary is truly that: Whatever you want to do (of course, you're still going to have to pass ACP).

[Guest Sieve]

A couple of things to note:

• If this is a SH plan, remember that the rate of match cannot increase as the amount of elective deferrals increases (Treas. Reg. Section 1.401(m)-3(d)(2)). And, of course, there is the discretionary match limit in a SH plan of 4% of compensation (Treas. Reg. Section 1.401(m)-3(d)(3)(ii)).
  
• An NHCE match is not taken into account under the ACP test (and therefore must pass the non-discrimination rules of IRC Section 401(a)(4)) if it exceeds certain maximum limits (Treas. Reg. Section 1.401(m)-2(a)(5)(ii)). This is intended primarily to prevent the old bottom-up QNEC ACP correction abuse, but it conceivably could apply with very high match rates.
  

[Kevin C]

Our daily valuation software had a problem with this when we first had it come up in 2007. At the time, they had part, but not all, of the disproportionate match rules Sieve referenced included in their programming. The software was excluding part of the match when it really wasn't supposed to be excluded. They showed us how to work around it. I don't know if that has been fixed. If your match is over 100%, it wouldn't hurt to carefully review the testing to make sure it is working correctly for your situation.

[austin3515]

Hmm..

So let's say you have a plan that matches 300% of the first 3%, so the total match is up to 9% of pay. In that scenario, it would be unusual to have to exclude any match because the "representative matching rate" provisions.

As an example, if only ONE NHCE defers the full 3% and no one defers anything else, the maximum match allowed in the test is 5% of pay, and the other 4% would be disregarded?

Is that basically what you're cautioning?

I had absolutely never thought about it before. Fortunately, I don't think I've ever seen a match quite that generous, but you never know...

[Guest Sieve]

Actually, as I now read the regs more carefully (I, like you, have never considered it before), I don't think a single-level match (such as in the OP) would ever be disproportionate, even if it exceeds 100%, because, for purposes of determining the representative matching rate, you only look to the lowest match percentage of the top half of those eligible to defer who actully defer. (Treas. Reg. Section 1.401(m)-2(a)(5)(ii)(B).) (This is different from the representative rate used to correct either a failed ADP or a failed ACP test, which considers half of all eligible employees whether or not they actually defer or receive a corrective QNEC or QMAC allocation. Treas. Reg. Sections 1.401(k)-2(a)(6)(iv)(B) & 1.401(m)-2(a)(6)(v)(B).)

Since you consider someone as deferring 6% for this disproportionate match test (Treas. Reg. Section 1.401(m)-2(a)(5)(ii)©)--but not for the disproportionate contribution test when correcting a failed ADP or ACP--the representative matching rate would be 150% in your hypo because (i) only this one employee is considereed for purposes of determining the representative rate, and (ii) you assume this employee deferred 6% of comp, giving a matching rate of just 150% for this participant. And, the match taken into account for ACP testing purposes can be as high as twice the representative rate (or, in this instance, 300%) X the deferral (Treas Reg. Section 1.401(m)-2(a)(5)(ii)(A)). Thus, the entire match in your hypo would count for ACP purposes.

Apparently, this particular test becomes an issue where the rate of match increases as deferrals increase and also exceeds 100% of comp.

This particular disproportionate match test is not for correcting a failed ACP, as I thought--there's another disproportionate test for that, and for correcting a failed ADP test. (Treas. Reg. Sections 1.401(k)-2(a)(6) & 1.401(m)-2(a)(6).)

But, in any event, like you, I've never considered it because I've rarely seen a >100% match.

So, my caution was, apparently, an inadvertent misdirection, because it is not applicable to a single-level match (such as in the OP). An interesting exercise, perhaps, but not truly responsive to the OP.

[Guest LauraVanSteeter]

Okay, so I have a plan that matches 200% of the first 5% of Compensation. Does this fall under the single level match and I don't need to worry about it? I have been told that there was a change in the final 415 regs and I can't include anything over 100% in the ACP test. . .

Sitations would be greatly appreciated!

[Kevin C]

1.401(m)-2(a)(5) has the rules for determining which NHCE matching contributions can be included in the ACP test.