Discriminatory Matching Formula?

[WesleyT]

I have a takeover plan with an odd matching formula. I can't find the rationale that would disallow the formula, but I have some concerns and certainly can't replicate it on my document system. Any specific reasons why this formula is not permitted?

1% of compensation for each 3% of deferrals. Capped at 6%. Operation: A participant who defers 3%, 4%, or 5% will get a 1% match. Those deferring 6% and above get a 2% match.

They are operating with a 3% deferral minimum, which puts the minimum matching rate at 1% and maximum matching rate at 2%. Under that fact pattern, it isn't classified as a disproportionate matching rate.

The current plan document is actually written wrong, but has one of those fancy 'Other' catch-all boxes for the matching formula. So, if the formula is appropriate, I can change the document for future years. How to deal with the past years is a horse of a different color.

[Tom Poje]

if it was a safe harbor formula then that is strictly forbidden because the rate of match can't increase as the deferral rate increases.

arguably I think you have to test BRF (Benefits Rights Features)

is the formula currently available to everyone?

yes, everyone 'could' defer at least 6% and therefore get the full match.

is the formula effectively available to everyone? (or put another way, in the real world can enough NHCEs take advantage of this?

that is debatable. and there is no mathematical test available for testing effective availability.

if the only people who are deferring at 6% are HCEs I'd say that is a negative - but that doesn't necessarily make it so.

even the govt must have its leanings against something like a match that increase around the 6% level - the basic match in a safe harbor is only up to 5% and not higher. even an enhaned match can't be used if greater than 6% (at least for ACP purposes)

[Jim Chad]

A zero match on the lowest deferrals looks bad to me, FWIW

[MWeddell]

Assuming it's not a safe harbor plan, this is probably fine. Tom Poje nailed it.