SH Match Question

[buckaroo]

I have a client who wants to design the plan the following way: SHMAC 100% up to 4% and an additional match with a formula of 0% of the first 4% and 100% of the next 2%. I believe that due to the increasing match formula on the additional match, the plan would be subject to ACP testing. My colleague beleives that because the entire match is effectively 100% of the first 6%, then no ACP testing is requried.

There are effectively no caps on the elective deferral precentages.

Opinions would be greatly appreciated.

[WCC]

I agree with you, it does not satisfy the ACP safe harbor. I think that is clear in Treas. Reg. 1.401(m)-3(d). Do you want to attach a vesting schedule to the 2%? Is there concern that the sponsor can afford 4% each year but may not be comfortable fixing an additional 2%? Why not make the safe harbor 100% on 6%?

[MWeddell]

Your colleague is correct.

Please read Treas. Reg. 1.401(m)-3(d)(2), entitled "Matching rate must not increase." The prohibition on having the matching rate increase as the amount of the employee's deferrals increases applies to "matching contributions," not "discretionary matching contributions" or "matching contributions not used to fulfill the 401(k) safe harbor requirements" or any other subset of matching contributions. The prohibition seems to apply to all matching contributions, so the prohibition is not violated.

[401king]

Is there a part of this formula that does not meet the ACP Test Safe Harbor contribution formula, thereby receiving a 'free pass' on the ACP test? The formula does not exceed 6% of compensation; allocation is not greater than 4% of compensation (max is 2%). I do not believe there are escalator caveats in the ACP Test contribution, but have not had to look that up before.

[Tom Poje]

tell your colleague to look at Code 401(m)(11)(B) there are three limitations on matching contributions

(I) can't make in excess of 6% deferred

(ii) rate of match doesn't increase as deferrals increase

(iii)HCE can't receive at a higher rate than an NHCE

[MWeddell]

tell your colleague to look at Code 401(m)(11)(B) there are three limitations on matching contributions

(I) can't make in excess of 6% deferred

(ii) rate of match doesn't increase as deferrals increase

(iii)HCE can't receive at a higher rate than an NHCE

Yes, but the original poster's facts do not suggest that any of the limitations were violated here. The relevant possibility seems to be (ii), but my post #3 explains why that limitation is not violated.

Sorry to be stubborn, but I'm about to recommend the same plan design to a client (100% match on first 6%: first 4% of match is a fully-vested SHNEC and last 2% of match has a vesting schedule), so I'd like the feedback directly if people think my post #3 is wrong and why that is.

[Tom Poje]

then I misunderstood what the original post was saying.

it would have been better to say the combined match formula for ACP is 100% up to 6%

[John Feldt ERPA CPC QPA]

What does the EOB say? Oh, here it is (somewhere in the 2014 ERISA Outline Book):

Example - enhanced match on first 4% of compensation with discretionary match on higher levels of compensation. A safe harbor 401(k) plan provides a 100% match on the first 4% of compensation deferred. The employer also wants the discretion to contribute an additional amount on deferrals exceeding 4% of compensation but not more than 6% of compensation, limiting the rate of the discretionary match to 100% of such deferrals. When presented with this example at a Q&A session at the 2012 ASPPA Annual Conference, the IRS stated that this would not satisfy the requirements for the ACP safe harbor. The enhanced match formula of 100% match on the first 4% of compensation deferred is used to satisfy the ADP safe harbor, and the discretionary match cannot be combined with the enhanced match for ADP safe harbor purposes. Thus, the discretionary portion must be separately analyzed and it fails the requirements for the ACP safe harbor because it doesn’t match deferrals below 4% of compensation. In other words, where a portion of the match is used to satisfy the ADP safe harbor, the remaining match also must be able to stand alone under the ACP safe harbor. Where that formula is discretionary, it must allocate matching contributions starting at the first dollar of elective deferrals and otherwise meet the requirements for the ACP safe harbor. The IRS didn’t provide a citation to support this interpretation of the law. Treas. Reg. §1.401(m)-3 does not explicitly state such a rule. The IRS’ concern, although not expressed in the Q&A session, might be that where the discretionary match applies only to deferrals above a certain level, the employer may decide to make the discretionary match only when only HCEs are deferring at such levels or only a low percentage of NHCs are doing so. . . . Note, too, that the IRS did not take the position that the discretionary matching formula caused the fixed formula to fail to satisfy the ADP safe harbor. It was just the ACP safe harbor that was failed.

edited to add: So, that's not an official position, but certainly something to consider. If you don't have Sal Tripodi's The ERISA Outline Book, it might be worth a look.

[MWeddell]

Thanks, John. I tried locating a free copy on the Internet of the IRS Q&As from the 2012 ASPPA Annual Conference and had no success.

That discussion is in Chapter 11, Section 5.a.1)b) of the 2014 edition of the ERISA Outline Book.