Money Purchase Formula -> 100% of 401(k) Plan contributions?

[KJohnson]

Generally a pension plan must provide "definitely determinable benefits" and contributions to a money purchase pension plan must be "fixed" without being geared to profits 1.401-1(B)1(i). On the other hand, contributions to a profit sharing plan only must have a "definite predetermined formula" 1.401-1(B)(1)(ii).

You have a predetermined formula, but I am not sure that you have a "fixed" contribution or definitely determinible benefits.

[KJohnson]

I take that back--Rev Rul. 74-385

[Guest]

Small company (10 employees) maintains a 401(k) Plan. Employer wishes to contribute 100% match without a cap. The 401(k)Plan is drafted with a discretionary match to be determined annually by the employer.

Employer has been prevented from making the full 100% match in the past due to IRC §404 deduction limit and the high level of Employee Elective contributions.

Question: Can company adopt a Money Purchase Plan with a contribution formula equal to 100% of participant's Elective contribution to 401(k) Plan?

If yes, would the contributions be tested using the general test [401(a)] or the ACP test [401(m)]?

[This message has been edited by Scott McHenry (edited 03-29-2000).]

[david rigby]

I don't think so. See 401(k)(4)(A).

[Guest]

Thanks for the response.

401(k)(4)(A)states that...

Benefits (other than matching contributions) must not be contingent on election to defer...

I see your point and agree that the contributions cannot be tested under the general test [401(a)].

However, I believe that the contributions could be considered a matching contribution pursuant to 401(m)(4)(A)...

...The term "matching contribution" means-

(ii) any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee's elective deferral.

My take on this is that the code does not specify that matching contributions tested under 401(m) do not have to be in the same plan as the Elective deferrals, only that they have to be in a defined contribution plan.

[davef]

We administer a number of dual plan situations where deferrals are made under a 401(k) plan and the match is made under a MP plan. The adoption agreements for both plans coordinate between each other regarding the match.

Also, on several occasions we have had to explain the definitely determinable issue with the IRS and have cited Rev. Rul. 74-385 and GCM 35745 as support.

[John A]

Suppose that it is acceptable to put matching contributions into a money purchase plan. What happens if the ACP test fails or if the matching contribuiton is associated with excess contributions due to a failed ADP test? The money purchase plan is subject to section 412 minimum funding. How is this seeming contradiction resolved?

[davef]

I would think that satisfying any nondiscrimination rules would take priority over the minimum funding requirements. In order to satisfy 401(a)(4), you need to pass 401(m). Per IRC 412, the minimum funding rules only apply if the plan is qualified. So, IMO the minimum funding rules would apply only after making any ADP/ACP adjustments.

You could have similar issues in a MP thrift plan that has an employer match.

[KJohnson]

Could you put the ACP test into the contribution formula for the money purchase plan? It seems like what the IRS is concerned about in a "fixed" contribuiton is absence of employer discretion. If the amount of contibution is subject only to participant discretion based on how much they defer with a "maximum" based on the ACP test, I would think that you would have still fulfilled your 412 funding obligation as well as the "fixed" contribution requirement.