Matching 0% of first 5, then dollar for dollar

[austin3515]

What do I need to watch out for with a match that says the first 5% will not be matched, but then the match is dollar for dollar for 5% through 10% (i.e., the max match is 5% of pay, if you contribute 10%).

Same match formula applies to everyone. Is it just an effective availability test? Everyone in the organization is pretty highly paid.

[hr for me]

I could see where you might have ACP nondiscrimination testing issues if your lowest paid aren't putting in the 5-10% range. This might affect how much your HCEs can contribute (and be matched). Just because everyone is highly paid doesn't mean they will all contribute the higher %s.

I can honestly say I have never seen a match that doesn't start at the first percent put in by the employee, no matter how bad or rich the match formula might be. I guess I would wonder what goal the employer is trying to accomplish that couldn't be accomplished another way?

[austin3515]

They want to switch the first 5% to profit sharing so they can do cross-tested/profit sharing.

ACP Testing I do not think will be an issue as the participation is very very good.

[Lou S.]

I think you might have 410(b) issues on effective availability if too many NHCEs aren't contributing 5+% as they effectively don't have access to the match. Though I could be wrong in that analysis.

[david rigby]

Everyone in the organization is pretty highly paid.

Does this mean all participants are HCEs?

[Tom Poje]

if I have a last day rule then someone who terminated does not show on the ACP test

if I have an hours requirement and they fail hours they do not show on the ACP test.

I guess if they defer less than 5% they can't get a match so they don't show on the ACP test.

however, for coverage any actives in that group are includable and not benefiting, and any terminees > 500 hours as well.

while you may not have many NHCEs, if none can take advantage of this there may be issues., which ultimately is the point Lou is raising.

[Kevin C]

I guess if they defer less than 5% they can't get a match so they don't show on the ACP test.

Sorry, but I disagree. If they are otherwise eligible for the match, but don't defer at least 5%, they would still be included in the ACP test. 1.401(m)-2 says the test includes "eligible NHCEs" and "eligible HCEs". Those are defined in 1.401(m)-5. Someone who could defer, but doesn't consent to payroll withholding is still an "eligible employee", and I think it would be the same if they made an election to defer less than 5%.

1.401(m)-5

Eligible employee—(1) General rule. Eligible employee means an employee who is directly or indirectly eligible to make an employee contribution or to receive an allocation of matching contributions (including matching contributions derived from forfeitures) under the plan for all or a portion of the plan year. For example, if an employee must perform purely ministerial or mechanical acts (e.g., formal application for participation or consent to payroll withholding) in order to be eligible to make an employee contribution for a plan year, the employee is an eligible employee for the plan year without regard to whether the employee performs these acts.

(2) Conditions on eligibility. An employee who is unable to make employee contributions or to receive an allocation of matching contributions because the employee has not contributed to another plan is also an eligible employee. By contrast, if an employee must perform additional service (e.g., satisfy a minimum period of service requirement) in order to be eligible to make an employee contribution or to receive an allocation of matching contributions for a plan year, the employee is not an eligible employee for the plan year unless the service is actually performed. An employee who would be eligible to make employee contributions but for a suspension due to a distribution, a loan, or an election not to participate in the plan, is treated as an eligible employee for purposes of section 401(m) for a plan year even though the employee may not make employee contributions or receive an allocation of matching contributions by reason of the suspension. Finally, an employee does not fail to be treated as an eligible employee merely because the employee may receive no additional annual additions because of section 415©(1).

(3) Certain one-time elections. An employee is not an eligible employee merely because the employee, no later than the employee's first becoming eligible under any plan or arrangement described in section 219(g)(5)(A) and providing for employee or matching contributions, is given a one-time opportunity to elect, and the employee in fact does elect, not to be eligible to make employee contributions or to receive allocations of matching contributions under the plan or any other plan or arrangement maintained by the employer (including plans not yet established) for the duration of the employee's employment with the employer. In no event is an election made after December 23, 1994, treated as a one-time irrevocable election under this paragraph if the election is made by an employee who previously became eligible under another plan or arrangement (whether or not terminated) of the employer.

Eligible HCE. Eligible HCE means an eligible employee who is an HCE.

Eligible NHCE. Eligible NHCE means an eligible employee who is not an HCE.