Match based on compensation?

[Guest sueczer]

This is not a safe harbor match. Can the match formula be a percentage of pay instead of a percentage of deferral? For example, the employer is contributing a match to only people who defer equal to 3% of salary instead of a % of deferral. This resulted in a formula of 700% of deferral not to exceed 3% of pay. Would this raise any red flags with IRS or DOL? There are no highly compensated people in this plan.

[TLGeer]

Regs. 1.401(m)-1(a)(2) defines matching contributions as: (2) Matching contributions—(i) In general. For purposes of section 401(m), this section and §§1.401(m)–2 through 1.401(m)–5, matching contributions are—(A) Any employer contribution (including a contribution made at the employer's discretion) to a defined contribution plan on account of an employee contribution to a plan maintained by the employer; (B) Any employer contribution (including a contribution made at the employer's discretion) to a defined contribution plan on account of an elective deferral; and © Any forfeiture allocated on the basis of employee contributions, matching contributions, or elective deferrals. (ii) Employer contributions made on account of an employee contribution or elective deferral. Whether an employer contribution is made on account of an employee contribution or an elective deferral is determined on the basis of all the relevant facts and circumstances, including the relationship between the employer contribution and employee actions outside the plan. An employer contribution made to a defined contribution plan on account of contributions made by an employee under an employer-sponsored savings arrangement that are not held in a plan that is intended to be a qualified plan or other arrangement described in §1.402(g)–1(b) is not a matching contribution.

The fact that there are no HCEs in the plan means that discrimination is not an issue. So the question you ar raising is whether this is a matching contribution at all.

Given the facts, I don't think that issue is relevant. As long as the plan satisfies the requirement for a definite formula for allocation of contributions, the plan should be OK. The rules related to matching contributions are all related to nondiscrimination. Since there are no HCEs, who cares?

Even if the status as a marching contribution were relevant, your plan should still be OK. The contribution would still be "made on account of" the deferrals. The fact that the contribution is made on account of the first dollar of deferrals rather than on account of each dollar of deferrals does not matter.

Not to say the IRS won't be troubled by this. My experience is that when there is a highly unusual plan provision, the IRS wants to know the underlying business reason. Even where that reason is not relevant, it goes to showing a non-abusive purpose and helps them feel more comfortable with the unusual provision. I would document the business reasons thoroughly.