Allowable Formulas for Discretionary Match

[vanders2240]

I am currently assisting an auditor in reviewing another TPAs ACP testing for a large 401(k) plan with a discretionary match. The employer decided to give a match for the 2014 plan year after 3/15/15. They told the TPA what they would like to do (100% match on up to 6% deferrals), but also said they did not want to have a failed test with refunds. This original formula was failing ACP by a long shot, so they then told the TPA that they wanted to spend a total of $200,000, and they wanted the TPA to figure out a match formula that would pass ACP testing. Through what the TPA called "trial and error" they ended up giving all eligible NHCEs a match of 95.4% on deferrals up to 6%. The 10 HCEs on the other hand received various matching percentages from as low as 37.5% up to 82.5% on deferrals up to 6%.

Does anyone see a problem with this? We have never done anything like this at our firm before. As long as you give the NHCEs a better matching rate, is it okay to adjust individual HCEs in whatever way the TPA... oh, wait, I mean "plan sponsor" decides, and then declare that as their discretionary match?

[ETA Consulting LLC]

You have to satisfy the definitely determinable formula. Typically, everyone would receive the same formula. On what authority could you: 1) decide a formula and 2) cherry pick those employees who receive it.

You can see where under "1", you have the discretion to decide the formula, but "2" becomes your issue. To effectively place each participant in their own allocation group for a matching contribution 'may' be contrary to your plan's terms.

Good Luck!

[austin3515]

I think it is extremely clever! Great idea! It addresses the clients objectives and avoids refunds! It is completely and totally wrong but who cares, the client is happy!

I can pretty much guarantee you they owe the HCE's the full match. The TPA "Stole" money from them. The test might fail, but they get the match money back (assuming they are vested).

[Tom Poje]

perhaps it works, but first, what does the document say.
for instance, one such document has the following language:
NOTE: The discretionary formula in D.6a must meet the nondiscrimination requirements regarding benefits, right or features described in Treas. Reg. section 1.401(a)(4)-4.
if and of itself then, the allocation described above passes that because it favors the NHCEs. but as ETA notes, there are probably issues with definitely determinable.

on the other hand, the document might also contain language similar to this
(i) Correction Methods. The Plan may, pursuant to applicable Treasury Regulations, do any of the following to avoid or correct excess contributions and/or excess aggregate contributions:

(1) provide for the use of any of the correction methods described herein;

(2) limit contributions in a manner designed to prevent excess contributions from being made; or

(3) use a combination of these methods.

so it is possible to limit the match of the HCEs to pass testing. I have never seen this done giving one HCE 37.5% and another 82.5% but I suppose that fits the document language -

if each HCE ended up with the same $ in match (or same ACP%) as a result I'd say that would be less likely to raise an eyebrow. at least amongst themselves the HCEs are treated 'equally'.

[Tom Poje]

Austin - 'vesting' is a 'maybe'

see example 7 of 1.401(m)-2(b)(5)

ee has excess match of $1000

ee is 60% vested

plan has 2 choices.

distribution 600 and forfeit 400

or

distribute 1000, but now you have to 'track' the 'unvested' portion.

in 2 years the person will be 100% vested, so it goes away and the person comes out ahead because they didn't forfeit!!!!!

so for example the person has a $2000 match balance before corrections.

his vested balance is 1200.

so he receives the 1000 in correction. so now his remaining vested balance is 200

so you get the odd participant statement that says 2000 - 1000 distribution = end bal 1000.

60% vested, but your vested balance is only $200 because we already paid you out additional. anything to confuse him. but next year he will be 80% vested.....

[vanders2240]

Thank you all for your helpful responses! The document is an EGTRRA Corbel Volume Submitter. The adoption agreement says...

A. Matching Formula.

b.[x] 1.[x] The Employer may make matching contributions equal to a discretionary percentage, to be determined by the Employer, of the Participant's Elective Deferrals.

And, in determining the Employer matching contribution above, only Elective Deferrals up to the percentage or dollar amount specified below will be matched:

5.[x] a discretionary percentage of a Participant's Compensation or a discretionary dollar amount, the percentage or dollar amount to be determined by the Employer on a uniform basis for all Participants.

I do not see in the basic plan document an option to limit matching contributions to prevent the excess. The corrective procedures seem pretty standard to me - Corrective Distribution/Forfeiture or Corrective Contributions, or a combination thereof.

Can someone help me understand the definitely determinable formula requirement? Could the Employer claim that the different HCEs were different classes of employees, so that it would be okay to give each class a different match formula? They could then state in their corporate resolution when they declare the match, the different formulas used for each class? I do not believe this is what happened in my original case above, but I am trying to figure out the logic of why a TPA (with an ERPA designation) would think this is okay.

[Tom Poje]

ugh, it says uniform basis for all employees. I don't know how you get around that.

one of the old Corbel documents we have (2008?) has the following language (you would find it in the corrections sections section, not the matching section if it exists:

(f) Administrator may prevent projected failure. If during a Plan Year the projected aggregate Contribution Percentage Amounts to be allocated to all Participants who are Highly Compensated Employees under this Plan would, by virtue of the ACP Test of Section 4.7(a), cause the Plan to fail the ACP Test, then the Administrator may automatically reduce proportionately or in the order provided in Section 4.8(b) the projected share each affected Participant who is a Highly Compensated Employee of such contributions by an amount necessary to satisfy the ACP Test of Section 4.7(a).

I think 4.7a is simply the top down method for running the ADP/ACP test.

[MWeddell]

Could the Employer claim that the different HCEs were different classes of employees, so that it would be okay to give each class a different match formula? They could then state in their corporate resolution when they declare the match, the different formulas used for each class?

Yes, one can do that, but not with the plan document language you quoted, which does not assign employees to separate classes. Furthermore, it is too late to make a discretionary (optional) amendment for the 2014 plan year. I agree that whatever their matching formula is (e.g. 95.4% on deferrals up to 6% of pay) they have to make the same match for all eligible employees.

Note that the plan document's matching contribution formula doesn't comply with the definitely determinable requirement today by leaving both the matching % and the maximum deferrals that are matched undefined, but it is common for the IRS to issue favorable determination letters on that type of language.

[vanders2240]

Thank you for your replies, Tom. This will be my last follow up!

Correct me if I am wrong, but I think the "uniform basis for all participants" line is referring to the deferral % to be matched; which in the original case above was 6% for all participants. If that sentence is also applicable to the matching %, then I agree that this way of allocating the match is obviously not allowed, and we can put this issue to bed!

I have read the matching and ACP test/failure sections of the document and there is no option for the administrator to prevent a projected failure. The closest thing I can find in the document is this portion below, but I do not think this would allow them to allocate the Match as described above. Do you agree?

10.18 PLAN CORRECTION

The Administrator in conjunction with the Employer may undertake such correction of Plan errors as the Administrator deems necessary, including correction to preserve tax qualification of the Plan under Code Section 401(a) or to correct a fiduciary breach under the Act. Without limiting the Administrator's authority under the prior sentence, the Administrator, as it determines to be reasonable and appropriate, may undertake correction of Plan document, operational, demographic and employer eligibility failures under a method described in the Plan or under the IRS Employee Plans Compliance Resolution System ("EPCRS") or any successor program to EPCRS. The Administrator, as it determines to be reasonable and appropriate, also may undertake or assist the appropriate fiduciary or plan official in undertaking correction of a fiduciary breach, including correction under the DOL Voluntary Fiduciary Correction Program ("VFC") or any successor program to VFC. If the Plan is a 401(k) Plan, to correct an operational error, the Plan Administrator may require the Trustee (or Insurer) to distribute from the Plan Elective Deferrals or Vested matching contributions, including earnings, where such amounts result from an operational error other than a failure of Code Section 415, Code Section 402(g), or a failure of the ADP or ACP tests.

[Tom Poje]

correct, that section has nothing to do with the situation in hand.

The particular document I looked at from Corbel was in section 4.8 (f)

[vanders2240]

Thank you, MWeddell. That makes sense.

[John Feldt ERPA CPC QPA]

You might want to look at a PPD document. In the pre-approved basic document in the discretionary match section, it pretty much gives the employer the discretion to to pick and choose which employees get a match and how much to each. At least that's how it reads to me.