Does this work: a profit-sharing contribution based on compensation, a

[Guest Kelly R]

ER has historically matched 100% on the first 3% deferred & 50% on the next 2% deferred. Had a really profitable year, so they want to contribute additional matching contributions up to the 15% deduction limit. ER does not want to contribute this amount as a Profit Sharing contribution, only wants to reward those who have deferred 401(k). ER wants to contribute the additional match based on compensation. Is this a possible option? I think not. My thought is to allocate the total match dollar amount pro-rata based on deferrals. (total match dollar amount to get to deductible limit is more than two times salary deferrals) Please provide citations if possible.

[Guest]

what does document say?

is it by formula or purely discretionary. If discretionary, but has been based on the 'historic' formula you indicated, you may indeed be correct they have problems. In fact, if document says match is discretionary, I would hope there is some type of board resolution, since match wasn't $ for $. At least, I would feel more comfortable if they have been using a tiered formula if I had something in writing.

don't know if I can tell much more w/o some more info.

check document for other options.For instance, if it allows QMACS you could certainly allocate an additional 100% vested match. (I don't believe there is a stipulation you have to fail a test to allocate a QMAC)

[LCARUSI]

Kelly -

You're proposing a compensation based allocation - but only if employee made 401(k) contributions.

Sounds to me like you'd be making a benefit (other than a matching contribution) contingent upon employee making 401(k) contributions.

You can't do that.

[Guest Kelly R]

Tom Poje -- Formula in plan doc. is purely discretionary, but to be based on salary reduction. No % of sal red given, no % cap on comp.

LCARUSI -- something messed up w/ the title of my topic yesterday when Tom Poje responded. My original title was "match contribution formula." Part of his response is now my title. I take it you don't agree w/ him? Please see my question in the text above. Any thoughts?

[Guest Marcia Fradkin]

What about entering the matching contribution amount as a matching forfeiture? Then it can be allocated based on salary, only if salary reduction contribution is made.

[Dave Baker]

Kelly - I'm the trouble-maker (I changed the name of this topic to try to make it more specific) -- did I misunderstand what you mean by "ER wants to contribute the additional match based on compensation. Is this a possible option?"

[david rigby]

Is top heavy an issue?

What about 415 limit?

[Guest Kelly R]

Dave Baker -- the new title is o.k. Wasn't sure if LCARUSI had read my question or just the topic title.

pax -- Plan is not top heavy. Yes, several will fail 415 with this allocation.

I guess my main question is "Is it possible to allocate match based on compensation?"

If not, what does anyone else think about a profit sharing contribution to be allocated only to those who deferred 401(k)? Does anyone have a solution??!!

[This message has been edited by Kelly R (edited 11-05-1999).]

[Guest Dan Ashley]

I agree with LCARUSI, above who concluded "you can't do that", but for a slightly different reason. Contributions to a DC plan which, under the facts and circumstances, are "on account of an elective deferral" are defined as matching contributions. 1.401(m)-1(f)(12).

So, whether you call it matching or not, it is. Matching contributions must satisfy 401(a)(4). But they can't use the general or design based safe harbor tests. The exclusive way of satisfying 401(a)(4) is the ACP test. 1.401(m)-1(a). So, the answer is, yes you can do it, but you will have to satisfy the ACP test. I am guessing you will fail that test, otherwise you wouldn't have asked the question.

[MWeddell]

I agree with Dan Ashley's post. You can do this, but it's a matching contribution subject to 401(m) testing. You also have to have a definite allocation formula in the plan document and consider whether the Section 415 contributions are due to the type of error that allows for corrections.

[david rigby]

Well actually, maybe the application of the 415 limitation would limit the allocation to certain HCE's, which might then permit the ACP test to be passed.

Possible?

[Guest]

ok, if I understand things correctly:

Plan is NOT top heavy. Hurray!

match formula is purely discretionary. No limit on amount of deferral - which is probably a good thing.

now comes the decision, how to allocate the match. lets look at it from a different point of view.

pretend it was profit sharing. I am not allowed to say "This year I am going to allocate $x for comp = this and $y to comp above 50,000. Next year I will do something different. The reason being of course, the formula, while discretionary, is not definiely determinable.

I believe the same logic applies to the match (I could be wrong)

If I remember from a discussion, a long time ago on PIX, a board of resolution should have been made stating how the match was to be allocated.(prior to the start of the year) in the past the allocation was x% of the first 3 and 1/2x% of the next 2.

I think you can safely allocate a match, simply substituting for x. That is the 'discretionary' part. if that formula would work, I would feel comfortable with it.

or maybe I am too conservative in this case to try something else.

[Brenda Wren]

I ran into a case like this! Unfortunately, after the fact. They were on a standardized document. PSP contributions were permitted..nonintegrated, comp to comp. Matching contributions were also permitted. The DOL was already auditing the plan when we were called in. We called the local IRS auditor (anonymously, of course) and he said it was very possible that the IRS could deem the so-called match they contributed as a PSP contribution. Therefore, everyone would be entitled to the contribution, not just those that deferred. This created a $100,000 potential problem for the client! Not to mention the fact that they did not adhere to their document. By the way, all testing passed and it was not in any way discriminatory, but it violated the communications to the employees in the SPD.

[Brenda Wren]

I ran into a case like this! Unfortunately, after the fact. They were on a standardized document. PSP contributions were permitted..nonintegrated, comp to comp. Matching contributions were also permitted. The DOL was already auditing the plan when we were called in. We called the local IRS auditor (anonymously, of course) and he said it was very possible that the IRS could deem the so-called match they contributed as a PSP contribution. Therefore, everyone would be entitled to the contribution, not just those that deferred. This created a $100,000 potential problem for the client! Not to mention the fact that they did not adhere to their document. By the way, all testing passed and it was not in any way discriminatory, but it violated the communications to the employees in the SPD.

[Brenda Wren]

I ran into a case like this! Unfortunately, after the fact. They were on a standardized document. PSP contributions were permitted..nonintegrated, comp to comp. Matching contributions were also permitted. The DOL was already auditing the plan when we were called in. We called the local IRS auditor (anonymously, of course) and he said it was very possible that the IRS could deem the so-called match they contributed as a PSP contribution. Therefore, everyone would be entitled to the contribution, not just those that deferred. This created a $100,000 potential problem for the client! Not to mention the fact that they did not adhere to their document. By the way, all testing passed and it was not in any way discriminatory, but it violated the communications to the employees in the SPD.

[Brenda Wren]

I ran into a case like this! Unfortunately, after the fact. They were on a standardized document. PSP contributions were permitted..nonintegrated, comp to comp. Matching contributions were also permitted. The DOL was already auditing the plan when we were called in. We called the local IRS auditor (anonymously, of course) and he said it was very possible that the IRS could deem the so-called match they contributed as a PSP contribution. Therefore, everyone would be entitled to the contribution, not just those that deferred. This created a $100,000 potential problem for the client! Not to mention the fact that they did not adhere to their document. By the way, all testing passed and it was not in any way discriminatory, but it violated the communications to the employees in the SPD.

[Brenda Wren]

Dave - help!....somehow this was submitted many times!!!

[Larry M]

Brenda, a good story is worth repeating...