After Tax and Match

[justatester]

Plan currently has 2 groups of employees who are eligible to defer but NOT eligible for the match. They are not passing the ratio coverage test. Of course we can run average benefits testing, but that is challenging as well.

One of the options we are considering is adding an after-tax feature and making all employees eligible for after-tax. This would solve the ratio problem. But, would the plan then need to run a BRF Test? Our thought is yes, since you have 2 groups of employees receiving a 0 benefit, and the rest receiving a match.

Thoughts?

[ETA Consulting LLC]

But, would the plan then need to run a BRF Test? Our thought is yes, since you have 2 groups of employees receiving a 0 benefit, and the rest receiving a match.

Thoughts?

No. You are "benefiting for 401(m)" if you are "eligible to make an employee after-tax" contribution, regardless of whether you actually make it and regardless of whether you are eligible to receive a match. Hence, your coverage ratio test would move to 100%. Bringing all those individuals into the ACP test, however, will make it harder to pass.

No additional testing would be required.

Good Luck!

[BG5150]

And you may also have the burden of someone actually wanting to take advantage of the after-tax feature....

[justatester]

Ok, I understand that everyone is not benefiting under 401(m), but do I need to be worried about benefiting at a different rate of match?

[ETA Consulting LLC]

Ok, I understand that everyone is not benefiting under 401(m), but do I need to be worried about benefiting at a different rate of match?

No. "The non-discriminatory rate of match" is more of a function of what is allowed to remain in the plan as opposed to the rate someone actually receives. I say this because this test is performed after all corrective distributions are made from ADP and ACP failure.

I see your issue with the logic, because it seems as if a plan can "make out like a bandit" by having a 100% coverage ratio test by simply adding an EE after-tax feature. The direct tradeoff is more people in the test. To your point, Benefits, Rights, & Features must be currently and effectively available on a non-discriminatory basis. That does lend itself to a potential discrimination issue when the "MATCH", itself, is available to a more restrictive group of people. But, look at how this is actually tested, the top ratio needed is actually 50%; to that test is much easier to pass.

Good Luck!

[justatester]

Ok, I understand that everyone is benefiting under 401(m), but do I need to be worried about benefiting at a different rate of match?

correction IS benefiting....

Yes, I would agree that the BRF ratios are much lower making it easier to pass.

Yes, it would negatively impact the ACP test, (having to include a bunch of zeroes) but I should have enough room on that to pass.

So are you saying, technically the plan would need to perform a BRF, but most likely would pass?

[ETA Consulting LLC]

So are you saying, technically the plan would need to perform a BRF, but most likely would pass?

Yes. I'm saying that after I determined that was what you were getting at. I, typically, look at rules in extremes in order to determine a position. I derived my answer as follows:

Let's suppose the plan allows all employees to contribute employee after-tax, but is written to provide matching contributions to only the owners. In this instance, everyone is benefiting under 401(m), but the matching contribution would clearly not be currently nor effectively available on a non-discriminatory basis; since it is impossible (under the plans language) for anyone who is not an HCE to receive the match. Even though this hypothetical is extreme, I think it articulates your point; and a clear need that this situation would require testing.

Good Luck!