ADP SHM and Additional Fixed Match Based on Year of Service

[Hokielady]

ADP Safe Harbor Enhanced Match- $1 for $1 up to 6% of pay

Fixed Match-Based on Year of Service- $1 for $1 up to-

Years 1 and 2= 1% of pay

Year 3=2% of pay

Year 4=3% of pay

Year 5 and higher =4% of pay

Will the Fixed Match fit into ACP safe harbor? Since all employees have the ability to grow into years of service will this meet the nondiscrimination test IRC 401(m)(11)(B)(iii)?

[buckaroo]

I would say that the additional fixed match would not fit into an ACP safe harbor. My initial thought is that you could have an HCE who receives a higher rate of match than an NHCE (e.g. last day requirement) and would cause the plan to be subject to the ACP test.

[Hokielady]

There is no last day requirement or hours requirement- if someone defers they get the match

With they way the formula is written - technically if an HCE and NHCE had the same years of service their match would be the same.

[Tom Poje]

but an HCE with 5 years of service will receive at a greater rate than an NHC who has only 2 years of service, and thus would fail the requirement all receive at the same rate.

I think arguing 'but not for those who have the same years of service' fails because now you have imposed a type of allocation condition for receiving the match, which is forbidden in a safe harbor.

taking a step further, lets suppose the only people with 5 years or more are HCEs. obviously that is discriminatory and not something the IRS would want to give a free ride on ACP testing, even if the NHCEs could grow into the greater match. Of course, such a plan design is still subject to BRF

[Kevin C]

No, your years of service match formula does not comply with the ACP safe harbor. See 1.401(m)-3(d)(4)

(4) Limitation on rate of match. A plan meets the requirements of this section only if the ratio of matching contributions on behalf of an HCE to that HCE's elective deferrals or employee contributions (or the sum of elective deferrals and employee contributions) for that plan year is no greater than the ratio of matching contributions to elective deferrals or employee contributions (or the sum of elective deferrals and employee contributions) that would apply with respect to any NHCE for whom the elective deferrals or employee contributions (or the sum of elective deferrals and employee contributions) are the same percentage of safe harbor compensation. An employee is taken into account for purposes of this paragraph (d)(4) if the employee is an eligible employee under the cash or deferred arrangement with respect to which the contributions required by paragraph (b) or © of this section are being made for a plan year. A plan will not fail to satisfy this paragraph (d)(4) merely because the plan provides that matching contributions will be made separately with respect to each payroll period (or with respect to all payroll periods ending with or within each month or quarter of a plan year) taken into account under the plan for the plan year, provided that matching contributions with respect to any elective deferrals or employee contributions made during a plan year quarter are contributed to the plan by the last day of the immediately following plan year quarter.

[GMK]

Tom and Kevin C have answered your question.

To add, consider that in most cases, most of the HCE's have been with the company longer than most of the NHCE's, so the proposed match favors, or is likely to favor, the HCE's. So it's not a safe harbor match.