Benefits, Rights, and Features

[Guest ghenson08]

Plan doc states that we will perform a true up each year to those who contribute the 402(g) limit and have an average rate of 4% or more.

Match is 4%

Vesting is 3 year cliff for all ER including True Up.

Most we allow any participant to contribute is 50% of their pay up to the $17,000, or $22,500, limit.

90% of our work force is NHCE. Of the 90%, 43% make $34,000 or less.

We have never tested for BRF as our ERISA attorney says we don't have to. Do we have any issues with this test as it relates to our true up rules?

[Guest ghal]

The document should state how the match is calculated: pay period, plan year etc. What do you mean by "true up"?

I have heard the "true up" term used when the document states the match is calculated on the plan year and the sponsor decides to fund on a pay period basis. At the end of the year the match is determined based on the final compensation numbers. The accounts are then funded according to the year end calculation. I don't necessarily call that a "true up", I would call it following the terms of the plan document.

I am not sure how benefits, rights and features comes into play in your question.

[MWeddell]

I think one can argue that the "benefit, right or feature" that must be tested is the available rate of match, looking at examples of what constitutes a BRF in the definitions near the end of Treas. Reg. Section 1.401(a)(4)-4. Some employees have one method (spreading contributions out evenly among pay periods) of getting all available rates of match and some employees have two methods (spreading contributions among pay periods and benefitting from the true-up match feature). However, they all have at least one method of getting all available rates of match, so no BRF test is needed.

That being said, it's an aggressive position, so have the client check with its legal counsel.

[Guest ghenson08]

The document should state how the match is calculated: pay period, plan year etc. What do you mean by "true up"?

I have heard the "true up" term used when the document states the match is calculated on the plan year and the sponsor decides to fund on a pay period basis. At the end of the year the match is determined based on the final compensation numbers. The accounts are then funded according to the year end calculation. I don't necessarily call that a "true up", I would call it following the terms of the plan document.

I am not sure how benefits, rights and features comes into play in your question.

The match is 100% on the first 4% per pay period. At the end of the year, we then do a calculation to find out who maxed out the contributions but may have missed out on the full 4% due to front loading their contributions early in the year.

[Bird]

I don't mean to challenge you but does the document actually say "The match is 100% on the first 4% per pay period" and "we will perform a true up each year to those who contribute the 402(g) limit and have an average rate of 4% or more?"

If so, that is pretty convoluted. Or are you saying, "the document says match is based on annual pay but we fund it each payroll and this is how we calculate the true up amount?"

If someone earned $40,000, but did 50% of the first $20,000 for a total of $10,000 ($400 match), then stopped deferring, would they not get a true-up because they weren't over the 402(g) limit?

[Guest ghal]

If the doc says it is a pay period match and the employee front loads, then that is the employees mistake. If an employee wants a the max match in that scenario, then they should fund their deferrals per pay period. This is one disadvantage to a pay period formula.

[chc93]

If the doc says it is a pay period match and the employee front loads, then that is the employees mistake. If an employee wants a the max match in that scenario, then they should fund their deferrals per pay period. This is one disadvantage to a pay period formula.

While I agree with you, I think the question is that someone who front-loads $10,000 will not get the "true-up" at the end of the year, but someone who front-loads $17,000 will get the "true-up" at the end of the year, and if this is allowed. (I hope I got this right) If this is the quetion, then I don't know the answer... but it doesn't sound right to me. I would think it's either "true-up" or not.

[Guest ghenson08]

Let me try to clear it up a bit. To me, our document doesn't pass the effective availability test of BRF.

We match 100% up to 4% of salary (not 4% of contributions). So if someone makes $100,000 and contributes 4% ($4,000), we will match $4,000. This is done on a per pay period basis. If we have an executive who makes $800,000 contributes $17,000 in February but only receives $8,000 in match, we will "true up" their match since they are missing out on $2,000 ($250,000 * 4%)

On the flip side of it, if a NHCE who makes $80,000 changes their deferral % throughout the year and contributes $10,000 and doesn't get the full match they are entitled to, they are not entitled to the true up match because they didn't hit the $17,000 limit.

Our ERISA attorney thinks that because our plan document states that match is "per pay period" then we do not have any issues but I feel we do with the effective availability piece of the BRF test.

[Guest ghal]

I think you need a new ERISA Attorney. How can you make an argument to true up a match when the doc says it is calculated on the pay period? By doing the true up you are essentially calculating the match on plan year comp, not pay period comp. Just because the employee goes over $250,000 in comp and defers $17,000 does not mean they are entitled to recieve a total match of $10,000. I don't think this is a benefits rights and features issues, it is an operational issue.

[masteff]

How can you make an argument to true up a match when the doc says it is calculated on the pay period?

ghal - Stop. You're missing part of what he's saying... the plan says both: pay period match but certain people get true up. He's not making up the true up, it's in the plan. It's perfectly fine to do a true up at year end after doing pay period match. The question is whether only giving the true up to certain people is against the rules.

[Bird]

You're missing part of what he's saying... the plan says both: pay period match but certain people get true up. He's not making up the true up, it's in the plan.

I don't know that that was confirmed. And it's strange enough, IMO, that I would want to read the exact language before making any more comments.

[Guest ghenson08]

How can you make an argument to true up a match when the doc says it is calculated on the pay period?

ghal - Stop. You're missing part of what he's saying... the plan says both: pay period match but certain people get true up. He's not making up the true up, it's in the plan. It's perfectly fine to do a true up at year end after doing pay period match. The question is whether only giving the true up to certain people is against the rules.

You are exactly correct...

[Guest ghal]

My apologies. I missed that point.

[BG5150]

If almost half of the employees make less than $34,000 not one of them could ever hit the $17,000 mark.

[Guest ghenson08]

Plan Document Match:

(a) Pay Period Match. The Employer shall make matching contributions to the

Employer Matching Accounts of each Participant who has compensation reduction contributions

made on his behalf under Section 4.1 for any pay period. The amount of such matching

contributions shall be calculated by reference to so much of the Participant's compensation

reduction contributions under Section 4.1 for such pay period as do not exceed four percent (4%)

of the Participant's Deferrable Compensation otherwise payable in such pay period.

The Employer matching contribution shall equal one hundred percent (100%) of so much of the

Participant's compensation reduction contributions under Section 4.1 for such pay period as do

not exceed four percent (4%) of the Participant's Deferrable Compensation otherwise payable in

such pay period.

Plan Document Plan Year Match:

(1) General. For Plan Years beginning on or after January 1, 2011, the

Employer shall make matching contributions to the Employer Matching Accounts of Participants

eligible under (2) below to receive such match in the amount (if any) determined under (3)

below.

(2)Participants Eligible for Plan Year Match. A Participant shall be eligible

for the Plan Year match if he meets all of the following:

(A) he is an Eligible Participant (as defined in Section 4.2©) for the

Plan Year;

(B) he made Section 401(k) contributions during the Plan Year equal

to the limit in section 402(g) of the Code (or greater, in the case of a "Catch-Up Eligible Participant" under Section 4.1(a)(2)); and

© he made Section 401(k) contributions in the aggregate for the Plan Year of at least four percent (4%) of his Deferrable Compensation payable during the Plan Year (excluding Deferrable Compensation paid prior to the time the Participant was eligible under Section 3.1(b)) but received pay period matching contributions under (a) above in the aggregate for the Plan Year of less than four percent (4%) of the Deferrable Compensation payable during the Plan Year (excluding Deferrable Compensation paid prior to the time the Participant was eligible under Section 3.1(b)).

[Bird]

OK, I apologize for questioning the accuracy of your statements.

I just think it's odd that the plan would be written that way instead of simply having the match be annual, 100% up to 4%.

You might be right about the BRF issue.

[Guest ghenson08]

Any idea on what part of the BRF test we would have issues with? Our ERISA attorney says the true up amount can be aggregated with the per pay period amount for the year so we would pass all tests.

[Bird]

It's beyond my pay grade, sorry. You are effectively excluding a large group of NHCEs from the extra match, but I don't know if the extra match is in fact a separate BRF.

[Guest A_Dude]

My (2) cents... It appears allowable. If you refer to the ERISA Outline Book Chapter 9, page 142 (BRF Section), two seperate formulas for matching do not need to be tested for nondiscrimination. So, even if you veiw this in the conservative manner, treating this as another match level it does not need to be tested for BRF. Do they pass a rate a group test? Assuming they pass all the nondiscrimantion testing I would say there are okay. "Wages" (business decision) permit the disparity because of the deferral limit, and it seems like someone spent a lot of time crafting a nifty way to not to give the NHCEs a dime more. And, if the DOL audited they would most likely give the employer a hard time.... is it really worth it to them?

[Guest rmassa100]

Sorry to just join in now, but I was researching something similar and came across this thread.

I don't see how this would NOT be a BRF issue. The true-up contribution being made only goes to those contributing 4% or more to the plan. Under the regs in 1.401(a)(4)-4 I believe this equates to a matching contribution with multiple allocation rates.Under the regs the right to each rate of match would have to be currently and effectively available to enough of the NHCEs to be avaialble in a nondiscriminatory manner.

To test this for nondiscrimination, you do not need to perform a rate group test, or an average benefit percentage test. To test for current availability, only the nondiscriminatory classification under 1.410(b)-4 would be needed (see the regs under 1.401(a)(4)-4(b)(1)). But testing under effective availabilioty is a facts and circumstances test. So even if you have the numbers to pass 1.410(b)-4, you still need to make an argument that it is reaonable to assume that the NHCEs could qualify for this. For example, the IRS could the claim that, because of your employee population, it isn't reasonable to assume that your average NHCE would be able to defer 4% or more of their income to qualify for the true-up (FYI: I'm just making that example up to try and play Devil's advocate for a moment).