SH Plan with discretionary match

[QNPG]

Safe harbor plan is satisfying the ADP safe harbor by making the 3% non-elective contribution. The plan also has a discretionary match formula of 0-7% deferred=0% match; 7-8% deferred= 100% of 1% match (participant will receive 1% of compensation as match if they defer more than 7%).

The ACP test will be performed since this formula exceeds the 6% limit but my question/concern is related to the rate of match increasing as the rate of deferrals increase. Since the ACP test is going to be done, is this tiered match acceptable if we can satisfy the BRF test?

Any guidance would be greatly appreciated.

QNPG

[Tom Poje]

well, the rate of match is greater at a higher rate, so even if there wasn't a 6% cap on deferrals you would have to test as this formula fails one of the ACP safe harbor requirements. (rate of match requirement)

expecting that many NHCEs to defer over 7%? (or I suppose if you had 1 HCE at that rate and a bunch of HCEs who didn't, it would pass BRF)

[QNPG]

Thanks, Tom. I appreciate your response.

[MWeddell]

Yes, for a plan that is not intended to satisfy the 401(m) safe harbor requirements, that kind of match formula is permissible.

[Belgarath]

I admit I find this subject a little murky.

I understand that it isn't safe harbor, so is subject to ACP testing. Let's assume you pass that. Where I find it confusing is how you satisfy the 401(a)(4) testing for BRF.

I have no problem with current availability. It is available to anyone who is willing to defer that amount.

How do you test "effective" availability, which is facts and circumstances? At what deferral level is it no longer "effectively" available? I suspect most of us would generally agree that you'd probably be ok if the discretionary match was 0% on the first 1% of deferrals, and 100% on deferrals of 2-3%. I also suspect that most of us would generally agree that 0% match on the first 15%, and 100% above 15%, would not satisfy effective availability. So you are left with something in between.

This is one of the reasons I heartily dislike increasing tiered match formulas. Suppose instead we look at a little more moderate example: plan is safe harbor nonelective 3%. Employer wants to make a discretionary tiered match that "sort of" takes into account the 3%, so wants a match formula of 0% for the first 3% deferred, and 50% of the next 2%. Would that pass BRF testing? Again, how would you "prove" or justify it?

[MWeddell]

Belgarath does point to an open issue, that cannot be completely dismissed.

That said, I think it would be an hard argument for the IRS to make stick that the match rate was effectively available to a group of employees that substantially favored HCEs based on all the relevant facts and circumstances if the actual matching dollars allocated (either with or without corrective distributions) satisfied the ACP test.

[Belgarath]

I wondered about that myself. That's certainly a "reasonable" argument by most standards - I just can't help being apprehensive, since the IRS clearly delineated in 1.401(m)-1(a)(1)(ii) the fact that nondiscrimination testing for BRF's is in ADDITION to the ACP testing. It seems like if you could use ACP results to justify BRF, then BRF wouldn't be necessary at all?

I may just be getting paranoid in my old age. I like your idea a lot better. Maybe I just need to visit the Wizard of Oz to see if he can give me courage.

[MWeddell]

Well, there are times (for example, one plan covers two locations and there are different match formulas for each location), where the plan may pass ACP testing and flunk BRF testing on the availability of match rates. My interpretation does not complete nullify the need to perform BRF testing on the availability of match rates.

I am suggesting that it would strike me as unusual for (1) there to be one match formula currently available to all eligible employees, (2) for the plan to pass the ACP test (with or without the need for corrective action), but (3) the better match rate was effectively available to a group of employees that substantially favored HCEs.