Match Question 1 - Tiered Formula

[Gilmore]

Client would like a two tiered match formula in which up to the first 4% of compensation deferred is matched at 0%.  Second tier 4 to 6% of comp matched at 50%.

Since each participant is matched the same at each level of deferral, is this an effective availability issue?  And assuming the match is communicated to all participants, an acceptable match?

Thanks very much.

[Mr Bagwell]

Gilmore,

I am going to take a stab at this....

From a practical sense, I think the two tiered hypothetical is dumb.  Generally, the employer is trying to get participants to defer to help pass testing.  This doesn't help.  It gives the appearance of the employer trying to be cheap and getting one over on the rank and file.   I'd be doing my best to put this hypo down in a hurry.  And if this was all good to go.... calculating the match on the 5th and 6th%..... ugh, no thanks.

From a plan perspective, it could be an effective availability issue.  What if the NHCEs don't defer over 4%?  What if the HCEs all defer to 6%?  Seems like a BRF issue kicks in.  And the BRF could change every year.

Tell the employer to do a .25 match on the first 4%.  Keep it reasonable and simple.   The above tier is not reasonable or simple.

My two cents.

[Kevin C]

I agree it's a bad idea.  Have they looked at automatic enrollment?

[Gilmore]

Thanks for the input.  I will review with the client.

[MWeddell]

Yes, this plan design is highly likely, but not certain, to comply with the BRF regulations. 

There is a question whether the effective availability requirement of Treas. Reg. Section 1.401(a)(4)-4(c) is met.  However, given that the plan will have to satisfy the ACP test on the amount of match that is actually received, it would be awfully difficult for the IRS to argue that the group of employees to whom the match was effectively available substantially favored HCEs when the group that actually used the match fell within the ACP test limits after any ACP test correction, if needed, was made.  Furthermore, all of the examples of BRFs that fail the effective availability requirement were a good deal more egregious than what your client desires to do.

Still, I would caution the client that the plan design is unusual and so it possesses some risk.