Matching Contribution Inequity - Change to straight match not defined as a % of salary?

[MD-Benefits Guy]

Our company has a policy to match 20% of an employee's 401k contribution up to 6% of their annual salary. One of our Sr. Managers is questioning the fairness of the policy. As he points out:

Employee A makes 100,000 and contributes 10,000 during the year....we will match on 6,000 for this employee...thus the employee will get a matching contribution of 1,200

Employee B makes 60,000 and contributes the same amount, 10,000....but this employee will only receive a $720 match (6% x 60,000 x 20%).

This Sr. Manager's stance.....if both employees are contributing 10,000, then they should both receive the same match.

A couple of questions:

1) Does anyone else have a match that isn't capped by % of 401k wages....he is looking for a matching calculation that is based on a flat rate contributed by the employee and not capped by a percentage of salary

2) How would moving to such a matching formula impact testing?

Would be curious to hear some thoughts on this concept.

Thanks.

[Tom Poje]

well, every plan that has a safe harbor basic match has the same issue.

I think the general logic is that someone who makes more $ is able to defer more $. therefore capping the match at a % of comp somewhat levels the field. That is not the case in your example. but how many people making 60000 can afford to defer 16.666%?

in the old days if you failed the ADP test, the HCE who deferred the largest % got socked with the refund. this penalized the HCE who made, for instance only 110,000 and deferred 10% (11,000), trying to put away as much as possible, as oppossed to the HCE who made 250000 and deferred 17000 or 6.8%.

again, in the old days, the person deferring 10% had the refund. but he only deferred 11,000 and the person who deferred 17000 had no refund.

now its the one who defers the largest $ amount.

is that any more fair or unfair? but arguably today, the person who deferred 6.8% is penalized because in reality he deferred a smaller %.

[BG5150]

1) you could have a match that was 20% on deferrals up to $10,000. Or 20% of deferrals, but nor more than $2,000 in match.

[MWeddell]

Matching 20% of all deferrals will increase the cost of the matching contribution (of course) but it also is likely to make the ACP testing more difficult to pass (but still no more difficult than the ADP test is to pass). I'd guess I'm not telling you anything you don't already know.

Has anyone told the senior manager that his/her stance isn't the typical way of looking at the situation? There are many other elements of a typical compensation & benefits factor for which internal equity is measured based on % of compensation, not based on raw dollar amounts. It's not breaking news that an employee with a higher base salary might also receive a proportionately higher benefits package.

[K2retire]

If the plan is not safe harbor, they don't have to cap the match at all. That would solve the problem, although it is likely to increase the total contribution.

[MD-Benefits Guy]

Thank you for the responses. I agree that this should be a non issue and that there are many elements to comp, many of which appear to create some level of inequity in various regards. Additionally, I don't think this would even have much of an impact. Any suggestions on what I can throw at this manager to help convince him that this is not something worth pursuing. From top to bottom, I have HR support, just looking for a solid/specific reason to give this manager on why we cant do it.

A few initial thoughts:

- we are a on a prototype plan....wouldnt changing the match to something like he's trying to suggest mean we couldn't use use a prototype plan (unless that is an approved option under the plan...which i dont think it is)

- Testing....I am not intimately familiar with the testing, so I need some help here.....could this type of match foul up our testing or our options.

Thanks again.

[Mike Preston]

Different prototype sponsors built in different options. Instead of asking for a general response here the best thing you can do is to look at the employer's prototype and see whether it would allow for this sort of change.

As mentioned earlier, the change will cause the ACP test to be more difficult to pass, but no more difficult than the ADP test is now. If you are passing the ADP test by way of what is known as "borrowing", then this will definitely make it more difficult to pass. But this assumes that the HCE's are the ones that primarily benefit from the change and that isn't at all clear to me based on what you have posted. Instead, it may encourage additional deferrals by NHCE's and that will definitely make the tests easier to pass.

In other words, you can't tell in advance which way to predict based on the information you have provided.