Different rates of match conditioned upon where participant directs hi

[Guest LMalone]

We have a 401(k) plan that allows participant direction into a menu of investment funds as well as into employer stock (combinations allowed). Deferrals that are invested in the menu are matched 25%; deferrals that are invested in employer stock are matched 75%. The right to these investments is available to each participant; each may choose to invest in the menu and/or the stock. Employees are aware that the higher match is available if they invest in employer stock. We may even have the same employee investing in both, thus getting 25% match on some deferrals and 75% match on others.

QUESTION: Must these different matches be tested under 410(B) as a "benefit, right or feature"? We think not, and are hoping not, since this is not actually what is described in the 401(a)(4) regs for BRF. We are hoping to apply the rules under (k) that since an employee is eligible to defer (or in our case, designate investments), but chooses not to, 410(B) still passes.

Any thoughts? Any authority?

Thanks.

[Alf]

The 401(a)(4) regs state that each rate of matching contribution is a separate benefit, right, or feature that must be tested. My guess is that you will have to look at each employee, calculate the actual rate of match they got, and then test the group of employees at each rate.

[MWeddell]

I agree with lmalone that there's not a 410(B) issue. Because the match is available to all eligible employees, it's not a 401(a)(4) benefits, rights, or features issue. Only 401(m) and the multiple use limit need to be tested.

I don't recall that there is any guidance on this issue other than the regulations themselves.

[This message has been edited by MWeddell (edited 02-16-2000).]

[LCARUSI]

I'll be argumentative and say:

1) The plan provides a 25% match.

2) If I invest my contribution in company stock, I receive an additional contribution equal to 50% of the contributions directed to stock

3) The contributions in (2) don't sound like matching contributions to me. I receive it by virtue of my investment election. Therefore it might be subject to other testing under 404(a)(4).

[MWeddell]

LCarusi, I'm unsure how to respond.

What other 401(a)(4) testing is there? Are you contending that these dollars are not subject to 401(m) testing and therefore should be tested under 1.401(a)(4)-2? Or are you saying that the BRF current availability testing under 1.401(a)(4)-4 should be run without disregarding the condition that individuals select company stock? Or are you asserting a different argument?

[Guest LMalone]

LCARUSI, did you mean 401(k)(4)? In working through that section, it seems that no benefit (other than the match) is conditioned upon the employee deferring. It could be argued that the higher match is conditioned on the employee investing in a particular way, but not conditioned on deferring.

By the way, I have placed a call to the IRS hotline, and the gentleman that answered the phone had actually already read my posted message! He said he would try to get back with me today. I will certainly pass along his response. Thanks to all of you for you comments thus far.

[Guest ak]

Isn't this an "effective" availability issue rather than a "current" availability issue? Do the facts indicate that HCEs take greater advantage of the 75% match.

[Jon Chambers]

And how about the fiduciary issues (enticing investment in company stock through the greater rate of matching contributions)? And SEC registration and prospectus issues (how the arrangement is described in the 11K filings)? I'm not sure that these are per se violations, but they look awfully strange. And I recall that no benefit (other than matching contributions) can be conditioned on participation in a 401(k) arrangement. Does a conditional incremental matching dependent on the participant's investment selection violate this requirement? Without knowing the answers to any of these questions, I'd suggest that the benefits philosophy behind this structure is flawed. It seems to me that the sponsor would be better served by taking company dollars (or stock) earmarked for the incremental match, and using these funds to make an across the board profit sharing contribution on behalf of all employees. The company could continue to offer stock as an option on equivalent terms with the other menu choices. Stock ownership would be more broad based (everyone would own some) and the appearance of coercion/enticement would be eliminated.

------------------

Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[Guest [Pat M]]

If the goal is to promote employee ownership of ER stock (for whatever reason), then what about amending plan to force all match into the ER stock fund?

[IRC401]

I assume that the plan prohibits employees from moving money out of the company stock account for some period of time. Otherwise, employees should put the maximum (matched) amount in employer stock and diversify immediately.

If the plan doesn't permit quarterly asset switching, then it shouldn't qualify as a "404© plan", and there would be fiduciary issues.

[Guest LMalone]

The IRS called and said that the different rates of match was clearly a BRF under 401(a)(4). Therefore, in addition to the ACP, it must pass the current and effective availability. He went on to say that it obviously passes the current availability since both rates are available to everyone. He said that while the "effective" availability test is on the books, he doesn't know how often it comes into play, but if there is at least minimal participation by NHCEs in investing in employer securities, we should be OK.

Thanks to all for your comments. You have given me some good ideas for alternatives that are not quite so murky.