Top-Heavy Minimum/401(m) Matching Part II

[John A]

When matching contributions that are not used to satisfy the ACP test are used to satisfy the top-heavy minimum requirement, are they still considered matching contributions or do they need to be reclassifed as nonelective employer (profit sharing) contributions? Since the sources have different vesting schedules, the answer is important. Regulations 1.416-1 M19 Q&A, and 1.401(m)-1 (12) (iii) cover this issue, but I am not sure how to interpret them. Which vesting schedule should apply, the one for match or the one for nonelective employer contributions?

[Guest]

that is a very good question, and I never thought about it before.

my guess, and a guess only, is these 'contributions' are still treated as match. my argument being, if I use deferrals in the ACP test, I don't apply the match vest schedule to them. (as opposed to using match in the ADP test where the regs clearly state to apply 100% vesting to them)

but again, i have no basis for my argument.

[Guest David Dye]

I don't have a specific reference that I can cite, but I feel pretty certain that the matching contributions are NOT reclassified as employer non-elective contributions. Even though used to satisfy the top heavy minimum, the matching contribution still uses the match vesting schedule.

[John A]

I tend to agree with both of you at this point and I like your line of reasoning. However, an administrator I work with copied a page from an 11/97 seminar (I think it was a PPD seminar, but I'm not sure). The seminar material contained the following: "To the extent the plan uses matching contributions to satisfy the employer's minimum contribution liability to the non-key employees, the plan must treat those contributions as nonelective employer contributions, not as matching contributions. The plan would disregard from the Code Section 401(m) actual contribution percentage (ACP) test any matching contributions subject to this rule, and the general discrimination requirements of Code Section 401(a)(4) would apply to such contributions. Furthermore, the matching contributions subject to this rule could not qualify as qualified matching contributions under the Code Section 401(k) actual deferral percentage (ADP) test. Treas. Reg. Section 1.416-1, M-19." Does the first sentence of that quote change either of your minds, or would you stay with your first answers?

[Disco Stu]

I am in agreement with the previous two posts that concluded that the match vesting schedule would still apply, and I would not be dissuaded by the language that you have quoted.

I have two rationales for my line of thinking. First, I don't think you could take away a benefit that had already been accrued (100% vested match) and make it subject to a vesting schedule just because the employer is trying to find a cheaper way out of a top heavy problem.

Secondly, and more generally, you are simply TESTING the benfit under 401(a)4 instead of 401(m). The 401(a)4 general test is only concerened with the amount of the benefit and whether that benefit is non-discriminatory. Whether or not the participant is vested in the benefit at this time is not relevant.

If the employer is nervous about this they can always fund the 3% top heavy minimum in addition to the match. But I don't think that I could justify yanking the match and puting into a source with a different vesting schedule.

[Guest]

also, in anything I have ever read about using match for top heavy purposes, I have seen plenty of warnings about 'this may cause failure of ACP test, blah,blah, blah.."

but I have never seen anyone else in the field also say "and if profit sharing vesting is 100% then these $ become 100% vested"

again, just because no one has mentioned it, doesn't mean it is true or false, but I figure someone else would have pointed that out by now.

[John A]

Thanks, Tom, Disco and David. When I initially read 1.401(m)-1 (12) (iii), it seemed so clear to me. Here's the language: (iii) Contributions used to meet the requirements of section 416. For plan years beginning after December 31, 1988, a contribution or allocation that is used to meet the minimum contribution or benefit requirement of section 416 is not treated as made on account of an employee or elective contribution and therefore is not a matching contribution.

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After reading this, it seemed so clear that a matching contribution that was used to satisfy top-heavy could not be considered a matching contribution. However, after reading your comments, talking to others, and reading 1.416-1 M19, I've changed my mind and agree with you. Here's the language: M-19 Q. May matching contributions described in section 401(m)(4)(A) be treated as employer contributions for purposes of the minimum contribution or benefit requirement of section 416?

A. Matching contributions allocated to key employees are treated as employer contributions for purposes of determining the minimum contribution or benefit under section 416. However, if a plan uses contributions allocated to employees other than key employees on the basis of employee contributions or elective contributions to satisfy the minimum contribution requirement, these contributions are not treated as matching contributions for purposes of applying the requirements of sections 401(k) and 401(m) for plan years beginning after December 31, 1988. Thus these contributions must meet the nondiscrimination requirements of section 401(a)(4) without regard to section 401(m). See §1.401(m)-1(f)(12)(iii).

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Your comments and the language in 1.416-1 have convinced me that the language in 1.401-m is only meant to say that matching contributions used to satisfy the top-heavy minimum are not matching contributions for purposes of the 401(m) (ACP) test, but are still matching contributions for other purposes. Again, thank you all very much!