Tiered Profit sharing contribution

[perkinsran]

Just came across a new 403b client that has a contribution formula that says:

< 3 years = 0%

4-6 yrs = 3%

6+ years = 6%

Seemed like a sneaky (maybe illegal?) way to get over the 2 year eligibility requirement. But if the plan can pass coverage testing at the three benefit levels, is this okay? Thanks.

[ETA Consulting LLC]

When you have a definitely determinable formula that precludes someone with more than two years of service from receiving a contribution (based solely on service), I'd say there are issues.

Good Luck!

[BG5150]

What about BRF testing?

[perkinsran]

Sorry but what is BRF (Benefit Rate Groups??)

[GMK]

http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=1051&context=legal

http://www.irs.gov/pub/irs-pdf/p6393.pdf

[ESOP Guy]

Sorry but what is BRF (Benefit Rate Groups??)

Benefits Rights and Features

Just to be clear you always have to make sure BRF are non-discriminitory and in some cases you have to do an actual test of your BRF.

[BG5150]

BRF: Benefits Rights & Features testing. Gotta make sure it's not only the HCEs who can and are getting the enhanced contributions.

[perkinsran]

It is a fairly large group with a small number of HCEs that passes all coverage and discrimination testing at each benefit level. My concern really was giving 0% to people who have less than three years. They require employees to wait 2 years to enter that portion of the plan and give them 0% for another year. Just doesn't smell right even if we pass all regulatory tests.

[Tom Poje]

1.410(a)(3)-3(e)Age and service requirements

(1)General rule.—
For purposes of applying the rules of this section, plan provisions may be treated as imposing age or service requirements even though the provisions do not specifically refer to age or service. Plan provisions which have the effect of requiring an age or service requirement with the employer or employers maintaining the plan will be treated as if they imposed an age or service requirement. In general, a plan under which an employee cannot participate unless he retires will impose an age and service requirement. However, a plan may provide benefits which supplement benefits provided for employees covered under a pension plan, as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, satisfying the requirements of section 410(a)(1) without violating the age and service rules.

the first example in the regs is a situation where one has to work for div 1 for 5 years then they would be eligible for div 2. The regs say the provision has the effect of requiring 5 years of service.

While no mention is made of it, I guess that also implies one would have to be 100% vested because it's more than 1 year wait???

The ERISA Outline Book Chapter 2 section IV part F 4.d (2012 edition) in reference to excluding 'part time employees' states

satisfying coverage requirements does not excuse impermissible classification exclusion - the IRS actually disqualified such a plan even though it could pass coverage!(and then said since the plan had received a determination letter it would let them off the hook if they amended plan prospectively)

[perkinsran]

Thanks so much Tom. This helps a lot.