Minimum deferral to get a match

[fiona1]

This one gets me every time. A 401k plan provides a year-end match. But in order to get a match, you have to defer a minimum of $500 during the year. As long as you've deferred $500, you'll get a match equal to 75% up to 8% of pay.

George only deferred $350 for the year, and therefore doesn't get a match. He is still an active employee - he just decided early in the year that he no longer wanted to defer.

Would George be included on the ACP test? I think the regulations say that you're included on the ACP test if you were eligible for the 401(m) portion of the plan. If there was an hours requirement on the match and George didn't work the required number of hours, then he would be left off the ACP. But I'm not sure about this situation. He had the ability to defer more than $500 - so does that make him eligible for the 401(m) portion of the plan?

[Tom Poje]

I'm not sure how to handle.

my own guess is that this is more of an 'amounts' issue rather than no match due to failure to meet an hours or last day provision, which means it would be like a match formula

<2% deferred = 25% match

between 2 and 4% deferred = 50% match

>4% deferred =100% match

in your case <$500 deferred = 0 match

>500 = 75% match, but I could be wrong.

[ESOP Guy]

A couple of disclaimers:

It has been around 10 years since I was the person in charge of aggressive ADP/ACP testing and I am doing this from memory. So if someone thinks I have the rules wrong please say so.

I am NOT saying Tom is wrong. I am just throwing out the case that can be made to leave these people off the ACP test.

This was my first reaction to the question.

If I recall correctly there is a link between 410(b) testing (coverage) and ACP testing. You only put people on the ACP test who are benefitting. The other side of that “coin” is if someone is not on your ACP testing they are not benefitting for 410(b) and hurts your ratio test.

Simple examples:

If a person could have deferred and didn’t they are ruled as benefitting for the ACP. This is because they would have gotten a match if they deferred. (Assume they met the hours, last day requirement etc.) So they would be zero on your ACP test, but would count as benefiting on the ratio test.

On the other had if the person deferred and did not get a match because of last day requirement they would be off the ACP test. This would help the ACP test, but hurt 410(b) ratio test.

So I started to think about this question in terms of how would I put the person on the 410(b) test. This might be as I work with 410(b) now more than ACP test. And as the old saying goes if all you have is a hammer everything looks like a nail. To me this person has to be shown as not benefiting on the ratio test. I see no way to exclude them from this, and it hurts your ratio test.

But if this person isn’t benefitting I don’t think they should be on the ACP test.

This might be an exception to the idea of the link between 410(b) and 401(m) testing, but I can’t think of why that exception would happen here. I could be forgetting something.

I really don’t think one is going to find a real clear answer to this one. This is just a plan provision that wasn’t thought of when the rules were made.

As a practical matter here is how I would handle the situation.

If would do the ACP test with this person on it and as a zero. AND I would do the 410(b) test with him on it as not benefitting. This is the worst case for both of the tests. If you pass you know you pass the worst case. If you fail one it might be time to get the client’s ERISA lawyer to make a ruling. He is the one that is paid the high billing rate to take the risk of deciding this kind of grey area incorrectly. TPA’s don’t get paid enough to make this kind of legal ruling.

Disclaimer to everything said above. It is just me giving thoughts. Before anyone goes off and does something for a plan/client make sure you do your own due diligence.

[Kevin C]

I think they are included in the ACP testing.

From 1.401(m)-5:

Eligible employee—(1) General rule. Eligible employee means an employee who is directly or indirectly eligible to make an employee contribution or to receive an allocation of matching contributions (including matching contributions derived from forfeitures) under the plan for all or a portion of the plan year. For example, if an employee must perform purely ministerial or mechanical acts (e.g., formal application for participation or consent to payroll withholding) in order to be eligible to make an employee contribution for a plan year, the employee is an eligible employee for the plan year without regard to whether the employee performs these acts.

(2) Conditions on eligibility. An employee who is unable to make employee contributions or to receive an allocation of matching contributions because the employee has not contributed to another plan is also an eligible employee. By contrast, if an employee must perform additional service (e.g., satisfy a minimum period of service requirement) in order to be eligible to make an employee contribution or to receive an allocation of matching contributions for a plan year, the employee is not an eligible employee for the plan year unless the service is actually performed. An employee who would be eligible to make employee contributions but for a suspension due to a distribution, a loan, or an election not to participate in the plan, is treated as an eligible employee for purposes of section 401(m) for a plan year even though the employee may not make employee contributions or receive an allocation of matching contributions by reason of the suspension. Finally, an employee does not fail to be treated as an eligible employee merely because the employee may receive no additional annual additions because of section 415©(1).

If you follow the definition of "Plan" in 1.401(m)-5, it means a plan after the application of mandatory/permissive aggregation/disaggregation under 410(b). Deferrals and the 401(m) portion are mandatorily disaggregated, so they are treated as separate plans. I think the highlighted sentence above would also apply if they have not contributed enough to another "plan" to receive the match.

[Tom Poje]

good cite.

I think the sentence follwoing what you highlighted also applies. The person in this case does not have to perform additional service (e.g. hours requirement or last day) but rather he simply didn't defer enough.

If the plan had a 50% match and I defer 0 I am still included in the test, I simply didn't dfere enough to get a match.