Multiple Match formulas

[dmb]

I think this is possible but wanted to make sure. Prospect would like matching contribution to be based on amount of salary deferral. Participants who defer less than 4% get no match, participants deferring 4 to less than 10 percent get 50% of deferral and 10% or more deferral gets 100% match. I know it must pass discrimination testing, but is it ok to provide match based on amount of deferral?? Thanks.

[BG5150]

I didn't think the match could go higher as the deferrals went up, just lower.

I've been wrong before.

[Guest Sieve]

Aside from meeting ACP, tiered matches are BRFs which must meet coverage. They otherwise are allowable.

I believe the prohibition on increasing matches is only for SH plans (for both the ADP and the ACP SH).

[Lou S.]

I think this is possible but wanted to make sure. Prospect would like matching contribution to be based on amount of salary deferral. Participants who defer less than 4% get no match, participants deferring 4 to less than 10 percent get 50% of deferral and 10% or more deferral gets 100% match. I know it must pass discrimination testing, but is it ok to provide match based on amount of deferral?? Thanks.

You might (or very likely) have difficulty passing discrimination testing on BFR as well as passing the ADP/ACP test, but leagally I don't think you have a problem drafting that match that way.

Also are you going to be doing the match on election or ADP? Because people under age 50 effetively can't contribute over 10% of pay once pay is 10 times the 402(g) limit and people over age 50 can't once pay is over 10 times (402(g) + catchup). That won't be a problem form discrimination because you can always discriminate againce HCEs but it might not sit well with an owner making over $245K who is "only" getting a 50% match.

[dmb]

Thanks for the responses. After some additional thinking, is it possible it does not need to be tested for BRF?? The match is available to all eligible, its up to the participant how much they wish to defer. Any eligible participant can defer 10% of pay and get max match.

[Tom Poje]

while true such a formula is available to all employees, is it effectively available to all employees?

in others words, is it reasonable to expect all employees to take advantage of such a formula? Or put another way, if the IRS audited the plan, looked and saw that all HCEs deferred 10% but the highest NHCE was 6%, the conclusion would probably be that, in effect, this match formula favored the HCEs, much less the fact you would probably fail ACP testing anyway.

a few years ago the IRS was asked if an automtic deferral plan could start at 6%, instead of 3% and stepping up 1% each year. They expressed a concern and had reservations about such an arrangement.

[Bill Presson]

while true such a formula is available to all employees, is it effectively available to all employees?

in others words, is it reasonable to expect all employees to take advantage of such a formula? Or put another way, if the IRS audited the plan, looked and saw that all HCEs deferred 10% but the highest NHCE was 6%, the conclusion would probably be that, in effect, this match formula favored the HCEs, much less the fact you would probably fail ACP testing anyway.

a few years ago the IRS was asked if an automtic deferral plan could start at 6%, instead of 3% and stepping up 1% each year. They expressed a concern and had reservations about such an arrangement.

Tom, let's say the formula is implemented and the BRF tested and it fails. What is the correction?

[Lou S.]

while true such a formula is available to all employees, is it effectively available to all employees?

in others words, is it reasonable to expect all employees to take advantage of such a formula? Or put another way, if the IRS audited the plan, looked and saw that all HCEs deferred 10% but the highest NHCE was 6%, the conclusion would probably be that, in effect, this match formula favored the HCEs, much less the fact you would probably fail ACP testing anyway.

a few years ago the IRS was asked if an automtic deferral plan could start at 6%, instead of 3% and stepping up 1% each year. They expressed a concern and had reservations about such an arrangement.

Tom, let's say the formula is implemented and the BRF tested and it fails. What is the correction?

I would think the correction would be an amendment to increase the match for one or more groups until BFR is passed.

[Bill Presson]

while true such a formula is available to all employees, is it effectively available to all employees?

in others words, is it reasonable to expect all employees to take advantage of such a formula? Or put another way, if the IRS audited the plan, looked and saw that all HCEs deferred 10% but the highest NHCE was 6%, the conclusion would probably be that, in effect, this match formula favored the HCEs, much less the fact you would probably fail ACP testing anyway.

a few years ago the IRS was asked if an automtic deferral plan could start at 6%, instead of 3% and stepping up 1% each year. They expressed a concern and had reservations about such an arrangement.

Tom, let's say the formula is implemented and the BRF tested and it fails. What is the correction?

I would think the correction would be an amendment to increase the match for one or more groups until BFR is passed.

Excellent. Don't know that I ever contemplated failure.