January 1 allocation date

[30Rock]

A client would like a year of service graded match formula with 3 tiers, the 3rd tier being after 10 years the match increases to 100% up to 4% of deferrals. However to be eligible for any match during the plan year, the participant has to be deferring on January 1st of each year and then the match is funded each payroll period. If they are not deferring on January 1 but start deferring later in the year, they will not receive the match. Is this formula valid? I could see January 1 being kind of like a reverse last day rule, but in this case they have to be employed and deferring on January 1.

Does anyone see any problems? Is this just a matter of coverage testing under 410(b)?

Thanks!

[30Rock]

I would like to add that the HCE's have been excluded from the match, so actually ACP, coverage and BRF testing will not apply. Is there any issue with contingent benefit rule by having the match dependent on whether they have a salary deferral election in place on 1/1?

Thanks

[Jim Chad]

FWIW I can't see a problem with this. You could get this result by checking the box on the adoption agreement that says that Salary Deferral elections can be modified only on the first day of the plan year.

[30Rock]

I guess I see your point. So it is just a salary deferral change practice, not an allocation condition? But still, sort of restrictive.

[Kevin C]

What are the eligibility requirements and entry date for the plan? Are there mid-year entrants who are not allowed to defer until the following January 1?

[ESOP Guy]

For what it is worth I once worked for a company that had a requirement that one had to be deferring on Dec 31 to get the match. Every few years someone would get mad when they figured out that they had stopped their deferral in Nov/Dec time and was not going to get any match. So I suspect this can be done. Just not sure it should be done.

Have they thought through the following facts? What if someone sets to def on Dec 31st of the prior year and on Jan 2nd set it back to zero. Unless a pay day happened to fall exactly right nothing comes from a person’s check, but they were deferring on the 1st day.

They do that to preserve their right to a match if they decide to defer latter in the year.

This is just one of several wrinkles one could come up with to make this idea a pain.

I guess to preserve your right and make it more clear you one could defer for the 1st pay check and then stop.

I am just editorializing here, but this is yet another example of a plan sponsor making a provision that could make the plan too complex. Sometimes keeping it simple stupid works.

[30Rock]

I totally agree, it makes it too complex

To answer the other person, there is no eligibility, but there is a tiered match with 0% for years of service less than 1.

[Bird]

I disagree that it's just a salary deferral change practice. You could get the same result with a once/year salary deferral change but that's apparently not how the plan reads.

I guess it can't create a discrimination problem if no HCEs are getting contributions, but at best it's a pretty arbitrary rule, and it pretty much stinks if you ask me. I also wonder how this is written into the document and whether they have applied for a FDL for the plan - I don't believe you'll find this provision in a prototype or VS plan.

[Tom Poje]

it is possible the DOL would say this doesn't meet the smell test e.g. the requirement that a determination be based on 'hours', or in the case of a non-DB on a last day provision.

or arguably, you are saying "an excluded class consists of those not deferring on Jan 1". While you can exclude classes or divisions, I think even that would fail in the fact you are requiring something additional on the part of the participant

Labor Reg 2530.200b-3b

(b) Rules generally applicable to computation periods. In general, employment at the beginning or the end of an applicable computation period or on any particular date during the computation period is not determinative of whether the employee is credited with a year of service or a partial year of participation, or incurs a break in service, for the computation period. Rather, these determinations generally must be made solely with reference to the number of hours (or other units of service) which are credited to the employee during the applicable computation period. For example, an employee who is credited with 1000 hours of service during any portion of a vesting computation period must be credited with a year of service for that computation period regardless of whether the employee is employed by the employer on the first or the last day of the computation period. It should be noted, however, that in certain circumstances, a plan may provide that certain consequences follow from an employee's failure to be employed on a particular date. For example, under section 202(a)(4) of the Act and section 410(a)(4) of the Code, a plan may provide that an individual otherwise entitled to commence participation in the plan on a specified date does not commence participation on that date if he or she was separated from the service before that date. Similary, under section 204(b)(1) of the Act and section 411(b)(1) of the Code, a plan which is not a defined benefit plan is not subject to section 204 (b)(1) and (b)(3) of the Act and section 411 (b)(1) and (b)(3) of the Code. Such a plan, therefore, may provide that an individual who has been a participant in the plan, but who has separated from service before the date on which the employer's contributions to the plan or forfeitures are allocated among participant's accounts or before the last day of the vesting computation period, does not share in the allocation of such contributions or forfeitures even though the individual is credited with 1000 or more hours of service for the applicable vesting computation period. Under certain circumstances, however, such a plan provision may result in discrimination prohibited under section 401(a)(4) of the Code. See Revenue Ruling 76–250, I.R.B. 1976–27.

[30Rock]

Thanks Tom you rock!!