Amount of Match Reduced By Profit Sharing Contribution?

[KJohnson]

Employer has adopted a matching formula of 100% of elective deferrals minus any amounts contributed to the profit sharing portion of the plan for that participant. Is this a permissible matching formula?

[MWeddell]

Sounds like only part of the money is a match subject to 401(m) testing.

[KJohnson]

M Weddell-Which part would be matching? Must any "remainder" go into 401(a)(4) testing. The profit sharing portion of the plan is designed as a straight % of compensation safe harbor formula? Would this then destroy the safe harbor?

[MWeddell]

The employer contribution that the participant will receive regardless of whether he or she contributes is nonmatching. It will be subject to testing under Reg. 1.401(a)(4)-2 although it sounds like it still meets a safe harbor. If this amount is fully vested, has certain withdrawal restrictions, etc., it might be shifted into the 401(m) test under the QNEC rules, but that's an exception.

The excess amounts that the employer contributes only because the employee made elective deferrals is a match subject to 401(m) testing. Thus, before the testing is done, you'll have to separate out just the portion that the employee wouldn't have received if he or she had not contributed.

If this still isn't clear, maybe it'd help if you gave a specific numerical example of your plan's contribution formulas.

[KJohnson]

I guess what I was worried about was whether "offsetting" the match by the profit sharing contribution was a problem.

Assume a 3% of comp profit sharing contribution. An NHCE making $30,000 (including deferrals) defers $2,000. NHCE would receive $900 in profit sharing and $1,100 in match ($2,000-$900).

An HCE making $100,000 defers $8,000. HCE would receive $3,000 in profit sharing and $5,000 in match ($8,000-$3,000).

The 3% would meet a 401(a)(4) safe harbor. Would I then just have to worry about the match portion passing the ACP test?

[MWeddell]

I agree with your understanding of the situation.

While the matching formula is unorthodox, it doesn't cause any effective availability problems under Reg. 1.401(a)(4)-4. The only test you need to run is the ACP test (which should be especially challenging with this match formula!).

[KJohnson]

Thanks. The formula, as applied, really means that you are not matching the first 3% of elective deferrals. (i.e. 0 for the first 3% and 100% thereafter). I know that most plans are written so that the rate of match cannot increase as the rate of deferrals increase. But is this a statutory or regulatory prohibition (other than barring the use of such a formula for ACP safe harbor purposes)?

[John A]

I'm having a hard time believing that there is any situation, including this one, in which it could be o.k. for an HCE to get a higher rate of match than an NHCE. In KJohnson's example, the HCE gets 5% of comp. and the NHCE gets 3.67%. I don't have a cite to point to, but it sure doesn't seem to pass the "smell test" to me. Please clarify.

[MWeddell]

There is no problem with the matching formula of 0% match on the first 3% of compensation deferred and 100% match on compensation deferred in excess of 3%.

The availability of the match does not favor HCEs. (As a matter of fact if one considers the 402(g) limit, the match's availability probably favors NHCEs).

The amount of the match is subject to ACP testing. You might have difficulty passing that test.

There are no other testing requirements applicable to the match. John A has asked for clarification but there's nothing more to add.

By the way, this isn't just a completely hypothetical response. I've seen this type of matching formula twice on clients I've worked with. It makes sense in the right situation.