Tiered match tied to service, not amount of deferrals

[Guest TaxedToDeath]

Plan has tiered matching contribution based on participant's years of service but the match is made regardless of the elective deferral amount. For example, participants with 2 years of service who make elective deferrals to the plan get a matching contribution of 2% of pay, while participants with 3 years of service who make elective deferrals to the plan get a matching contribution of 3% of pay, and so on.

But the matching contribution doesn't depend on the amount of the elective deferrals contributed, so one participant with 2 years of service could defer $2,000 and get the 2% match, while another participant also with 2 years of service could defer $20 and still get the 2% match, even if 2% of pay is more than the $20 deferred. Is it really a match if the same percentage is contributed for deferring participants with the same years of service, regardless of the specific amounts they defer? (It seems like a cross between a matching and a nonelective contribution.) And would this tiered match be subject to some sort of cross-testing, or does the ACP test cover it?

Thanks.

[John Feldt ERPA CPC QPA]

A true match must be based upon employee deferrals according to some type of formula structure that ties the two together. Anything else is an employer nonelective contribution. Employer nonelective contributions cannot be tested under an ACP test, even if they have been called a "match".

What is allocated to participants who only have 1 year of service?

edit:typo

[Guest TaxedToDeath]

What is allocated to participants who only have 1 year of service?

For the sake of simplicity and not to over-complicate this hypo, the participants with 1 year of service get 1% of pay.

[Guest Sieve]

I believe this is, in fact, a matching contribution (as per the definition in Treas. Reg. Section 1.401(m)-1(a)(2)(i)(B)), since it is an "employer contribution (including a contribution made at the employer's discretion) . . . on account of an elective deferral . . .".

Aside from ACP testing, the match formula would have to pass IRC Section 401(a)(4) non-discrimination testing as a benefit, right & feature. I believe that cross-testing would not be a permissible non-discrimination test for the match because a 401(m) plan is deemed to satisfy 401(a)(4)'s "non-discriminatory amount" test (Treas. Reg. Section 1.401(a)(4)-1(b)(2)(ii)(B)) but still must pass BRF testing (IRC Reg Section 1.401(a)(4)-4, & see especially -4(e)(3)(iii)(G)).

Edited to revise citation.

[Tom Poje]

so taking it to an extreme

if you have 1 HCE with 10 years of svc they would get 10% of comp (as a match, 0% if they don't defer)

and 1 NHCE with 1 year of svc would get 1% of comp (assuming they defer)

so "currently" (current available test) how many people are eligible for the 10% of comp match, 1 HCE 0 NHCEs

besides failing the ACP test, unless you have NHCEs with the same number of years of svc as the HCE with th most I don't see how it would ever pass BRF

unless I'm missing something in the description.

[Guest TaxedToDeath]

I believe this is, in fact, a matching contribution (as per the definition in Treas. Reg. Section 1.401(m)-1(a)(2)(i)(B)), since it is an "employer contribution (including a contribution made at the employer's discretion) . . . on account of an elective deferral . . .".

Aside from ACP testing, the match formula would have to pass IRC Section 401(a)(4) non-discrimination testing as a benefit, right & feature. I believe that cross-testing would not be a permissible non-discrimination test for the match because a 401(m) plan is deemed to satisfy 401(a)(4)'s "non-discriminatory amount" test (Treas. Reg. Section 1.401(a)(4)-1(b)(2)(ii)(B)) but still must pass BRF testing (IRC Reg Section 1.401(a)(4)-4, & see especially -4(e)(3)(G)).

Thanks, Sieve, and especially thank you for the citation. Very helpful!

[Guest TaxedToDeath]

so "currently" (current available test) how many people are eligible for the 10% of comp match, 1 HCE 0 NHCEs

besides failing the ACP test, unless you have NHCEs with the same number of years of svc as the HCE with th most I don't see how it would ever pass BRF

unless I'm missing something in the description.

I think you are right, Tom, it wouldn't pass BRF testing unless there are NHCEs with the same service as HCEs.

[Guest Quagmire]

I believe this is, in fact, a matching contribution (as per the definition in Treas. Reg. Section 1.401(m)-1(a)(2)(i)(B)), since it is an "employer contribution (including a contribution made at the employer's discretion) . . . on account of an elective deferral . . .".

Aside from ACP testing, the match formula would have to pass IRC Section 401(a)(4) non-discrimination testing as a benefit, right & feature. I believe that cross-testing would not be a permissible non-discrimination test for the match because a 401(m) plan is deemed to satisfy 401(a)(4)'s "non-discriminatory amount" test (Treas. Reg. Section 1.401(a)(4)-1(b)(2)(ii)(B)) but still must pass BRF testing (IRC Reg Section 1.401(a)(4)-4, & see especially -4(e)(3)(G)).

Thanks, Sieve, and especially thank you for the citation. Very helpful!

Helpful links:

1.401(a)(4)-1(b)(2)(ii)(B)

§ 1.401(a)(4)-4(e)(3)(iii)(G)

[Guest TaxedToDeath]

Thanks for the links, Quagmire. I appreciate it!