Discretionary Match

[Connor]

Is it possible for a plan with a safe harbor match to also offer a discretionary match and still retain its safe harbor status, i.e., avoid adp/acp testing & TH mins?  In other words, a triple stack match without a fixed match - could that still be considered a safe harbor plan?  If so, what would be the limitations on the discretionary match?

 

[John Feldt ERPA CPC QPA]

Yes. The discretionary match is limited to 4% of pay, the formula for the match must ignore deferrals over 6% of pay, the rate of match cannot increase as deferrals increase, cannot have any allocation conditions, must be described in the safe harbor notice, the plan must have provisions for the match, it must not allow any HCE to receive a higher match than any NHCE at the same rate of deferral, to name a few requirements.

it can be subject to a normal vesting schedule, such as 6-year graded.

[Connor]

Thank you , John - that's great!  If I may ask additionally: regarding how the discretionary match is described in the plan document and the safe harbor notice, a definitive formula must be stated (e.g., 66 2/3% match of the first 6% of comp up to 4% of comp), so the only discretionary thing is whether or not that contribution is made, not how it's allocated.  If the employer decides to make a discretionary match but wants to allocate it a different way, a plan amendment would have to be done to revise the formula - do I understand this correctly? 

[John Feldt ERPA CPC QPA]

The plan document would state that it’s discretionary. It can also state the upper limit of the match and any limit for deferrals that will be considered for the match, but more importantly, the document will state if the match is intended to be tested for ACP or exempt from ACP. If tested for ACP, the plan then must identify current or prior year testing. If the plan indicates it will be tested, you must follow the terms of the plan.

If the plan indicates it intends to be exempt from ACP testing, for a discretionary match, the employer can use that discretion to decide the percent of the deferral for the match formula, the match limit, and the largest percent of pay deferral that will get matched, but that does not all have to be in the plan document.

But keep in mind that the safe harbor notice must also describe this match to allow it to be exempt from ACP testing. So if the plan provides a 3% safe harbor nonelective, and they don't give any safe harbor notice before the beginning of the plan year (it’s not required for a safe harbor nonelective), then the match will not be an ACP-free discretionary match. There is an exception to that. If the 3% safe harbor is a QACA, and they don’t provide the safe harbor notice (it’s not required), they can still provide the ACP-free discretionary match if the plan provisions have it available. Strange, but true. I’ve never come across that in practice however.

If the safe harbor notice is generated from your plan document system, then I personally prefer to enter as much info in the plan document to help with the match description in the safe harbor notice, but not so much that it would require an amendment, destroying the discretion that we want the employer to retain. 

[Connor]

Super - thanks again!