Match formula that wants to be SH

[AlbanyConsultant]

I've got a client who is currently matching at 50% of the first 15% deferred, and he's tired of failing the ADP test. He'd like to put in a safe harbor match... but not change his match formula. The idea: 100% on the first 4%, then on top of that match so that it would be at the level the old match was.

Examples:

Defer 3%, get 3%.

Defer 7%, get 4 (because the "old match" would be 3.5%, which is under the safe harbor 4%).

Defer 11%, get 5.5% (4% safe harbor + 1.5% additional match).

In effect, this would be an increase in match for anyone who deferred less than 8%.

Can this be done? I presume that if it can, then you'd... test the "additional match" piece under ACP, but the deferrals would still get the SH benefit?

[Tom Poje]

assuming there is no vesting attached to the match, no eligibility either, then yes, that would be considered an enhanced match. for ACP you could test all match or exclude the first 4%.

[Guest Sieve]

Tom -- What about the fact that the match stalls at 0% from 4-8% of comp and then picks up again thereafter? Doesn't that violate the enhanced match SH rule that the match may not increase?

[Tom Poje]

I missed that stall. yeh, I think that takes it out of safe harbor, because of the rate of match rule. dang it, hate it when I miss the easy stuff. though I think you could get around it by have a 4% match up to 100% (enhanced match) and then have a discretionary match which would be ACP tested.

though since the original post said they were tired of having refunds, I'm not sure what that might accomplish. It sounds like the ACP test will fail, though I guess if you match at the end of the year and the document permits it, you wouldn't have to deposit any match that causes a failure.

[Guest Sieve]

Tom -- There was a momentary post (now deleted--unless I just imagined it) that said that this enhanced match formula is OK because the annual match ratio does not increase as elective deferrals increase (i.e., at 8% of comp, the annual match ratio is 50%, and it does not increase from 50% thereafter, even though the rate of match increases from 0% after the stall). This seems, actually, to be in line with the rule stated in the last sentence of Treas. Reg. Section 1.401(k)-3©(3), because the annual match ratio does not increase. Your thoughts?

[Tom Poje]

if I understand the question at 4% everyone receives 100%.

for the next 3% you receive nothing more, in effect 0%. then the match picks up again so someone who defers 8% or more. so I'd say have the following

1% 100% match

2% 100% match

3% 100% match

4% 100% match

5% 0% match

6% 0% match

7% 0% match

8% 50% match...

at that point I'd think the rate is blown out of the water

that doesn't seem any different than a formula like

1% 100% match

2% 100% match

3% 100% match

4% 100% match

5% 50% match

6% 50% match

7% 75% match

8% 75% match...

(By the way Sieve, are you warming up for the hockey playoffs?)

[Guest Sieve]

Yes, I'm still warming up . . . have been for years, but no calls to play . . .

Your understanding of the reg is exactly what mine is. But, I'm starting to question it, Tom, because the regs' language is "the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee's elective contributions may not increase as the amount of an employee's elective contribution increases". Why didn't the reg say that a matching rate cannot increase? Why does the reg say that the ratio for the plan year cannot increase? Aren't those different animals?

Examples: Under the OP, the ratio and the rate both start at 100% of deferrals, during the stall the rate reduces to 0% and the ratio is eventually reduced to 50% of deferrals(as of the end of the stall), and then the ratio remains at 50% of deferrals thereafter (even though the rate increases from 0% to 50%). In your last hypo, the match ratio after the 6% of comp level is 5/6 (83%), so an increase from a matching rate of 50% to a matching rate of 75% still reduces the annual matching ratio. What you clearly couldn't have in your hypo is an increase back to a match rate of 100% after 6% (because that raises the annual match ratio of 83% as deferrals increase). Is it the increase in rate that is forbidden, or an increase in the annual ratio?

I've always thought it is the rate that cannot increase. But, is that what the regs contemplate? Perhaps I'm way out in left field on this one (which is probably why no hockey teams wants me as a goalie . . .).

[Lou S.]

As others have noted to be safe harbor you'd have to be non-increasing rate of match at all levels as deferral rates increase.

If they still want to macth half of the first 15 something like

100% first 3

50% of next 2 (3-5)

35% of next 10 (5-15)

would still work but obviously this is an increase of some sort for all who are deferring less than 15% and you'd still need to test some or all of the macth in ACP since you are matching over 6% of pay.

edit - hmm see Sieve's prior post and my next one - I may be wrong on the whole nonincresing as rate increases as Sieve points out in the sematics of the regs...

[Lou S.]

Why didn't the reg say that a matching rate cannot increase?

Because that would have made too much sense.

Why does the reg say that the ratio for the plan year cannot increase? Aren't those different animals?

hmmm. the more I look at this the more you may be right

[Tom Poje]

but what is the intent of the reg (the English language is bad enough. for instance the regs says that when you have excess contributions that related match 'may' be forfeited. Does that mean I don't have to? no, it means that normally if someone was 100% vested in match you wouldn't forfeit, but in the case you are allowed to.)

so in a safe harbor plan, you get a free ride on ACP testing if certain conditions are met.

Its more likely that to have HCEs able to defer at a higher percent than NHCE are able to defer.

so if I match nothing at 6%, but all of a sudden I match at 8% that definitely seems to favor the HCEs, given the fact you are getting a free ride on ACP testing. (Of course, since you are talking a match above 6% of comp perhaps the point is moot since you have already violated the safe harbor conditions)

[Lou S.]

but what is the intent of the reg (the English language is bad enough. for instance the regs says that when you have excess contributions that related match 'may' be forfeited. Does that mean I don't have to? no, it means that normally if someone was 100% vested in match you wouldn't forfeit, but in the case you are allowed to.)

so in a safe harbor plan, you get a free ride on ACP testing if certain conditions are met.

Its more likely that to have HCEs able to defer at a higher percent than NHCE are able to defer.

so if I match nothing at 6%, but all of a sudden I match at 8% that definitely seems to favor the HCEs, given the fact you are getting a free ride on ACP testing. (Of course, since you are talking a match above 6% of comp perhaps the point is moot since you have already violated the safe harbor conditions)

I agree with you but the regs don't always say what the people who wrote them want them to say, much to their chargin later on.

It would be an interesting question for a conference to see if a macth that satifies the ratio test at every level of deferral but has an increasing rate at one or more steps could be an acceptable ADP safe-harbor, even if it fails the ACP safe-harbor and requires testing.

[Guest Sieve]

Tom --

The enhanced match does not have the 6% limit for SH ADP purposes. But the enhanced match does have the prohibition on ratio increases, which is the center of my inquiries.

It is not necessarily an advantage to continue to defer when the rate of the match is increased but the overall ratio is not being exceeded. There is no advantage to whose who continue defer when the match rate increases from 0% to 50% (say), if the overall ratio remains the same (or is actually lower).

For example, why, in the OP, is it a disadvantage to some if the overall ratio remains at 50% from 8%-15%, since those who defer less than 8% actually have a higher overall ratio and the rate increase from 0% to 50% simply retains the ratio at 50%? At lower deferral levels, this match formula is better than the original 50% up to 15% of comp, and is never worse, and those who continue to defer beyond 8% are getting no more of a match than the ratio they already have (i.e., 50% of their deferrals).

I'm not saying my interpretation is right, but I'm questioning my long-held understanding that the matching rate cannot increase. Any idea what Tripodi says?

I agree with Lou that this would be a good conference question for the IRS.

Edit -- Does an enhanced match have to meet ACP testing?

[Guest ERISACounsel]

I did have a momentary post where I threw out the idea that a safe harbor could be satisfied as long as the match ratio did not increase. Now that I've had a minute to look at this fully I would stand by that as a reasonable interpretation of the regulations. HCEs who are generally more likely to be able to contribute over 8% would not be getting a greater benefit then a NHCE who deferred 4%, 6% or 8% as the match ratio above 8% is no greater than at any lower deferral rate.

4% - 100%

5% - 80%

6% - 67%

7% - 57%

8% - 50%

9% - 50%

10% - 50%

As to the difference between "rate" and "ratio", in Notice 98-52, the IRS described the enhanced matching formula this way: "In addition, under an enhanced matching formula, the rate of matching contributions may not increase as an employee's rate of elective contributions increases." The notice defines Rate of Matching Contributions as "the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee's elective contributions for that plan year."

Finally, the limit on deferrals exceeding 6% of compensation only applies to the ACP safe harbor, not the ADP safe harbor which is being addressed here.