Disguised service condition if 2 year match tier

[30Rock]

Is there any issue if a plan has immediate eligibility, a 6 year graded match (or any vesting other than 100% after 2 years) and a tiered service match formula as follows:

0-2 YOS – 0% match; 2-5 YOS – 50% match; 5+ YOS – 100% match

The participant is not eligible under the match for any contribution until 2 years of service, but the vesting schedule is not 100% after 2 years of service. Is this permitted? There is no stipulation in the plan document either way.

 

Thanks!

[ETA Consulting LLC]

It's not permitted.  If eligibility for match exceeds one year, then vesting should be 100%.  I don't even see this as debatable since the zero match is hard coded in the plan document.

Let's suppose there is a similar instance where it's a nonelective and each participant is in their own group with eligibility of 1 year.  Let's also suppose, for whatever reason, that the employer (in their discretion) allocates zero percent to everyone less than two years.  NOW, you have a 'disguise' and the debates can begin; with the obvious argument being that the employer is effectively requiring more than 1 year in order to receive a nonelective. 

Good Luck!

[Flyboyjohn]

Agree that the hard coded match is problematic but I think with respect to the non-elective it's mere eligibility that's relevant, not the actual receipt of an allocation so I would have no problem with only providing non-elective allocations to employees with a certain tenure beyond 1 YOS.

Actually had an employer that used to give 30-year employees a $30,000 bonus until convinced of the wisdom (and significant payroll tax savings) of providing them a $30,000 profit sharing allocation (only NHCEs obviously).

[ETA Consulting LLC]

3 hours ago, Flyboyjohn said:

 I would have no problem with only providing non-elective allocations to employees with a certain tenure beyond 1 YOS.

I can see where this would be a problem; hence the debate :-) It would, of course, involve showing a consistent pattern of providing a zero contribution (under the  auspices of employer discretion) to anyone with less than 2 years of service.  But, it's not my call.  It's just something the IRS may challenge (in the same manner as they're know to challenge the indirect exclusion of service class employees).  The consideration here would be whether or not (under these facts and circumstance) 100% vesting would be required.

3 hours ago, Flyboyjohn said:

Actually had an employer that used to give 30-year employees a $30,000 bonus until convinced of the wisdom (and significant payroll tax savings) of providing them a $30,000 profit sharing allocation (only NHCEs obviously).

Absolutely no problem; doesn't even appear to be a potential for a problem and is actually a strategy I've recommended to a few of my clients.  In my case, it was "Do not give this young employee making $100,000.00 per year a $30K bonus.  You can give him $20K bonus; not $20,000.01, but exactly $20K and the rest should be a nonelective to the plan."
You know where I'm going with this 

Good Luck!

[Purplemandinga]

I think you could almost make this work. You could do this formula if you structured it right and assuming the demographics of your employee base allow you to pass. You would however have to tweak it a little, and setting up the vesting provisions may not be what was desired.

What I would do is set eligibility for match to one year - 1000 hours but set the allocation for less than two years of participation or employment at 0% of deferrals, 2-5 years at 50% of deferrals and greater than 5 would be 100% of deferrals. The big caveat here would be you would have to test each allocation rate for benefits rights and features, in addition and on top of passing ACP testing.

I would use 3 year cliff vesting instead of 2.

[30Rock]

Does any one know of any IRS commentary or Q&A at an IRS conference where this was addressed?

 

Thanks!

[Mike Preston]

No, but who cares? Suicide on a stick. 

[Tom Poje]

how about simply using the regs?

1.410(a)-3(e)Age and service requirements

 

(1)General rule.—For purposes of applying the rules of this section, plan provisions may be treated as imposing age or service requirements even though the provisions do not specifically refer to age or service. Plan provisions which have the effect of requiring an age or service requirement with the employer or employers maintaining the plan will be treated as if they imposed an age or service requirement. In general, a plan under which an employee cannot participate unless he retires will impose an age and service requirement. However, a plan may provide benefits which supplement benefits provided for employees covered under a pension plan, as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, satisfying the requirements of section 410(a)(1) without violating the age and service rules.

 

(2)Examples.—The rules of this paragraph are illustrated by the following examples:

 

Example (1). Corporation A is divided into two divisions. In order to work in division 2 an employee must first have been employed in division 1 for 5 years. A plan provision which required division 2 employment for participation will be treated as a service requirement because such a provision has the effect of requiring 5 years of service.

 

Example (2). Plan B requires as a condition of participation that each employee have had a driver's license for 15 years or more. This provision will be treated as an age requirement because such a provision has the effect of requiring an employee to attain a specified age.

 

Example (3). A plan which requires 1 year of service as a condition of participation also excludes a part-time or seasonal employee if his customary employment is for not more than 20 hours per week or 5 months in any plan year. The plan does not qualify because the provision could result in the exclusion by reason of a minimum service requirement of an employee who has completed a year of service. The plan would not qualify even though after excluding all such employees, the plan satisfied the coverage requirements of section 410(b).

 

Example (4). Employer A establishes a plan which covers employees after they retire and does not cover current employees unless they retire. Any employee who works past age 60 is treated as retired. The plan fails to satisfy the requirements of section 410(a) because the plan imposes a minimum age and service requirement in excess of that allowed by this section.

 

Example (5). Employer B establishes plan X, which provides that employees covered by qualified plan Y will receive benefits supplementing their benefits under plan Y to take into account cost of living increases after retirement. Plan X is not treated as imposing an age or service requirement.

 

Example (6). Employer C establishes a qualified plan satisfying the minimum age and service requirements. At a later time, entry into the plan is frozen so that employees not covered at that time cannot participate in the plan. The limitation on new participants is not treated as imposing a minimum age and service requirement. [Reg. §1.410(a)-3.]

[Purplemandinga]

So there is an example in the book for the CPC exam where it discusses the current availability requirement of the benefits rights and features tests.

If you have a copy of the 5th edition of the CPC exam page 81 discusses an example of this very situation. Less than 1 year of service receives a 25% match, greater than 1 but less than 5 is a 50% match and 5 or more is 100% match. It says the formula is allowed based on the demographics given with no mention of the above reg.

I would assume ASPPA wouldn't allow such an egregious example to be placed among the study materials for the CPC exam if this wasn't allowed. 

I'm very curious, the regulation is quite clear but why would it appear in the CPC manual?

Weird.

[ETA Consulting LLC]

33 minutes ago, Purplemandinga said:

Less than 1 year of service receives a 25% match, greater than 1 but less than 5 is a 50% match and 5 or more is 100% match.

There is no 0% for anyone with greater than 1 year of service. 

Good Luck!

[Purplemandinga]

Hmm, that makes sense ETA.  

Good to know! 

 

 

 

[MWeddell]

I disagree with the crowd.  What the original poster has suggested is permitted if the rates of available match satisfy BRF testing, the 401(m) portion satisfies 410(b) (and it'll make the ACP test a bit of a challenge).

Code Section 410(a) and the parallel provision in ERISA apply to "plan" meaning the whole plan, not the 410(b) use of "plan" which refers to just the 401(m) portion of the plan.  To be eligible for the "plan," the original post says there is immediate eligibility, so no 410(a) violation.

Of course, this still seems like a very dicey plan design, even if we can't pinpoint what rule it violates.  It certainly will require a custom-designed document and seems like it is inviting IRS scrutiny.  Definitely only proceed with the client's legal counsel looking at it more closely.  It's been a very long time since I've seen this design actually implemented.

[Purplemandinga]

That is interesting, I was thinking BRF would suffice as well but I was tripped up by the 410(a) reg posted above. I never considered it being a "plan as a whole".