Discretionary Match

[PensionMonster]

Is there any rule that prevents a 401k plan from having a discretionary escalating match? If not, do I need to simply pass the ACP test? Or do I also need to pass 401(a)(4) nondiscrimination testing?

[QDROphile]

At what point do you violate the requirement for determinable allocation provisions?

[austin3515]

So let me get this straight, after year end, you decide whether the match is 50% of the first 6% plus 100% of the next 3%, or if the match is 25% of the first 4% plus 100% of the next 3%?

You'll have a hard time convincing you're not doing that to increase the share of the match allocable to the owner.

[Belgarath]

Different rates of match are subject to 401(a)(4) testing. You shouldn't have any problem with current availability, assuming the different rates of match are available to anyone who defers that requisite rate. Effective availability, which is a facts and circumstances test, may be another issue. So you could potentially pass the ACP test yet still fail 401(a)(4).

[PensionMonster]

So, it sounds like it is possible to have an escalating match if both the ACP and 401(a)(4) nondiscrim test is passed?

The context of the question arose with a SH plan that has an enhanced 100% match on the first 4% of deferral. In addition, the plan thought it was satisfying an additional discretionary ACP free match with a 100% match on the next 2% beyond the first 4% of deferral. The match was not more than 4% of compensation and was based on compensation no greater than 6% We had suggested this was an incorrect application of the additional ACP free match formula. However, the current TPA is suggesting it is 'ok' since you end up in the same place as a '6% SH enhanced match.' We suggest that it does not meet the requirements of an enhanced match, but if it passes ACP and 401(a)(4) testing, then okay. .

[austin3515]

Definitely not an ACP Safe Harbor because you are forbidden from having the match increase as the rate of deferrals increase. From 26 CFR 1.401(m)-3 - Safe harbor requirements.

(2) Matching rate must not increase. A plan that provides for matching contributions meets the requirements of this paragraph (d) only if the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee's elective deferrals and employee contributions, does not increase as the amount of an employee's elective deferrals and employee contributions increases.

[PensionMonster]

So, Austin Powers, I agree the discretionary match is not ACP free. Would you agree that if the discretionary match passes the ACP test (with or without including the SH match, I think it can be done either way) AND a 401(a)(4) nondiscrimination test, such a discretionary match is okay?

[austin3515]

Yes, I think you would be ok, unless everyone but the HCE's work for minimum wage and there do not effectively have the opportunity to contribute more than 4% of pay.

I don't see how you would ever pass the ACP test, unless you can aggregate with the SH Match for testing, which I actually think you can?