How flexible is "discretionary match"?

[AKconsult]

We have a client whose plan allows for a discretionary pay period match; and an additional discretionary match at year-end for participants who are still employed at the time of allocation.

No formula mentioned in document, match can be uniform % of pay or a flat $ amount.

We just discovered that the employer decided on 12/24/14 to give a special match to 4 nonHCEs because he wanted to give them a "bonus". The plan document does not allow for a profit sharing contribution - only deferrals and match. Other employees got a match as well (as a uniform %), but these 4 individuals just got random dollar amounts deposited into their match accounts.

While this seems like it might not be permissible, I can't quite determine what rule has been violated? If we take the position that plan has allowed different rates of match, so it is subject to BRF testing, that is a nonissue because these 4 people are nonHCEs. And it helps the ACP test. So I can't see any testing problems with this.

Is this a plan document issue?

Thanks!

[Jim Chad]

How is the discretionary match worded in the document? Is this a reasonable interpretation?

[Lou S.]

It is unlikely the discretionary match calls for discretionary amounts/rates varying by employee similar to some cross tested plans that have everyone in their own allocation group but as Jim asks, what does the document say?

[AKconsult]

The document specifically states "Discretionary Match. The Employer will determine in its sole discretion how much, if any, it will make as a matching contribution. Such amount can be determined as a uniform % or as a flat $ amount for each participant."

This seems pretty flexible.

However, the VS document that we use does have an option instead of the above to choose to have the match allocated to "Different Employee Groups" which is described as "allocated separately to each designated employee group designated below" and that box was NOT checked. This probably more accurately describes what the client did.

So what happened does not create any kind of testing issue, since it only impacts nonHCEs. And I think that it would definitely have been preferable to use the "Different Employee Groups" option in the document. I am just not sure if the option that was chosen precludes the client from giving different rates of match.

[BG5150]

To me, it's not following the provisions of the plan. It doesn't matter that testing would pass.

[Tom Poje]

quite possibly one could say it doesn't meet a definitely determinable formula

while the match is discretionary I think that refers to setting a total $ amount or % for allocation purposes, but not also to 'eligibility' in the sense of 'only 4 of 15 NHCEs will receive the match'

[Bird]

a uniform % or as a flat $ amount for each participant

What BG5150 said. Everyone is supposed to get the same % or the same $. Doing anything else is not following the terms of the plan. "Discretionary" means the total amount is discretionary, not "we can do whatever we want."

[imchipbrown]

Any chance you could call it a de-facto cash-or-deferred election? Employer offers bonus and employees elect to defer it.

What brought me to the thread is the FT Williams Non-Standardized 401(k) Adoption Agreement of 2009. Section C.25 is:

Matching - Formula

25. Matching Contribution formula. The Company's Matching Contribution shall be allocated to eligible Participants who have met the requirements of B.20 through B.23 and C.20 through C.24 as follows (Section 4.02):
i. [ X ] An amount and allocation formula as determined by the Board

NOTE: The discretionary formula in C.25.i and the special schedule C.25.v must meet the non-discrimination requirements regarding benefits, right or features described in Treas. Reg. 1.401(a)(4)-4.

Sounds to me like anything goes that can pass 1.401(a)(4)-4.

[LANDO]

Let's hope there aren't any sales people eaves dropping on this conversation. Yikes!!! The answer has to be, this isn't allowed! That said, I agree the plain language of the document appears to allow for it, or at least it could be reasonably interpreted to to allow for it.

I think the most plausible arguement for not allowing it would be that such an interpretation doesn't meet the definitely determinable allocation formula requirement. That said, PS can be person by person, and somehow that's currently acceptable.

Hmmm.