403b Er Contribution testing

[perkinsran]

Client contributes 7% as er contributions if ee contributes at least 5%.  Less than 5% employees receives $0.  In testing this plan for nondiscrimination testing, would it fall under ACP or 401(a)(4)? 

[Luke Bailey]

It probably will fail both, but you won't know if it fails 401(a)(4) until you have tested the group that gets the match.  If the group that contributes at least 5% and therefore gets the match passes 410(b) (for example, the percentage of NHCEs who contribute 5% is at least 70% of the percentage of HCEs who do), you would be OK for 401(a)(4). For the 401(a)(4) rules, see 1.401(m)-1(a)(ii) and 1.401(a)(4)-4(e)(3)(iii)(G).

[perkinsran]

Thanks.  50% in our office think it is tested under 401m and the other 50% thinks it is tested under 401(a)(4).  Are you implying you think it has to be tested under both?

[C. B. Zeller]

I agree with Luke - it needs to be tested under both. The contributions are conditioned on employee deferrals, so it is a match and needs to satisfy the ACP test. Each rate of match needs to be tested for nondiscriminatory availability of benefits, rights and features under 401(a)(4).

It does not need to satisfy the general test for nondiscrimination, a.k.a. rate group test, which might be what you're thinking of as 401(a)(4), and is used to test nonelective employer contributions that do not satisfy a design-based safe harbor.

[Luke Bailey]

4 hours ago, perkinsran said:

Thanks.  50% in our office think it is tested under 401m and the other 50% thinks it is tested under 401(a)(4).  Are you implying you think it has to be tested under both?

Yes.

 

4 hours ago, C. B. Zeller said:

I agree with Luke - it needs to be tested under both. The contributions are conditioned on employee deferrals, so it is a match and needs to satisfy the ACP test. Each rate of match needs to be tested for nondiscriminatory availability of benefits, rights and features under 401(a)(4).

It does not need to satisfy the general test for nondiscrimination, a.k.a. rate group test, which might be what you're thinking of as 401(a)(4), and is used to test nonelective employer contributions that do not satisfy a design-based safe harbor.

perkinsran, what C.B. Zeller is pointing out is that the 401(a)(4) test is as a BRF, so my example of passing the ratio percentage test is overkill. It would appear that the match here would satisfy current availability (1.401(a)(4)-4(b)), but whether it passes effective availability  (1.401(a)(4)-4(c)) depends on facts and circumstances. Again, I would be skeptical regarding both tests, although if you pass the m test, seems like your facts and circumstances for effective availability would have to be pretty good.

Presents sort of an interesting compliance issue, because you won't know until you test actual contributions whether you are passing 401(a)(4). Same for 401(m), but there is of course a correction mechanism for a 401(m) failure. I guess at least arguably you could base your BRF/401(a)(4) conclusion for the year based on ACP after distributing any excess aggregate contributions and/or making QMACs, though, so maybe OK. But even if you pass 401(m), there is no guarantee that the match was effectively available.

[perkinsran]

Thanks to all.  I appreciate you feedback.