MA formula

[Guest money40]

Can a plan have the following MA formula?

100% to 1% deferral, nothing from 1-2%, then 100% from 3% to 5%.

As an example, part. makes $20,000 & defers 1%. He gets $200 MA for $200 Deferral. If deferral increases to 2% ($400) he would get no additional MA. However, if he raises his deferral percent to 3%, he will get an additional get an additional $200 in MA.

Thank you,

[austin3515]

Sure, why not (other than the obvious reason that it's crazy). Everyone gets the same formula, so BRF is not an issue. just the ACP test.

[cpc0506]

Sure, why not (other than the obvious reason that it's crazy). Everyone gets the same formula, so BRF is not an issue. just the ACP test.

Not sure I agree. Don't you have to do a coverage test for the different levels. The formula may be discrimininatory to nhce.

[austin3515]

Everyone is benefitting from the exact same formula. Your thinking of different match levels depending on how many years of service someone has. In that case, you need to run BRF testing (which uses coverage principles) to make sure that the match formula is not being provided to a discriminatory group. Perfect example would be "only employees with 20 years of service get the most generous match" when only the owner has 20 YOS. That's when there is a discrimination problem.

Also, if the IRS thought tiered matches were discriminatory they would not have used it for the Basic Safe Harbor MAtch formaul.

[Tom Poje]

but even with the Basic Match, its a requirement that the level doesn't increase as the amount of deferral increases. that is not true in this case.

The ERISA outline book would indicate tiered formulas must be tested for effective availabilty capter 11 section xii part E3b1

[austin3515]

I see... And admittedly was not aware of that requirement!

But the test is a facts and circumstances test of "Effective availability." What would exactly is preventing the NHCE's from contributing 5%?

I suppose the issue would crop up if the match was 10% on the first 10%, and then 200% on the next 2%. I guess I recognize the issue under this more aggregious set of circumstnaces.

So Ithink I cam to the right answer, albeit for the wrong reasons

I learn more from these boards than anything else I do!!

[John Feldt ERPA CPC QPA]

My first (real job) employer had a matching contribution formula like this (back in the 80's and 90's).

So, do you do a coverage test at each level to see what percent of NHCEs got a match at that level over the percentage of HCEs that got a match at that level, and then hope for 70%?

[Tom Poje]

well, since its facts and circumstances....

(or is it Joe FRIDAY and just the facts....)

I suppose you could use 1.410(b)-4©(3) on facts and circumstances as a guideline

though if more than 70% are deferring at the top level you'd think you'd be ok.

[austin3515]

But wouldn't you agree that the formula itself which provides for the highest level of match at just 5% of pay, that it should essentially be deemed to be nondiscriminatory?

[Tom Poje]

again, depends on facts and circumstances.

if there is a skip (e.g. no match between 2 and 3%), then what other facts are involved.

if it's mostly minimum wage people then I'd lean toward saying its discriminatory because most probably couldn't defer more than 3% and skipping that % hurts them.

[Guest money40]

Thank you all for your comments, additional questions & expanded discussion. I truly appreciate it!

Not sure a concensus was reached, but I feel much better about addressing this to the powers that be.

Thanks!