Discriminatory Effect of an Increasing Match

[Guest AEA]

I have an employer who has an investment advisor that is pushing them to adopt an "enhanced 401(k)." In essence, the plan will have an increasing match based on the amount of deferrals contributed - not service. For the first 6% the match is 50%, for anything over (up to 20%) the match is 65%.

I don't think that the formula is discriminatory on its face, but I'm concerned that it could be in practice - lower paid HCEs potentially being the ones to defer more as higher paid HCE's may be limited percentage-wise by their salaries. Will the plan also need to test for benefits, rights and features because of the different match rates? Other than the BRF test and ACP, is there any other testing that I am missing?

Would appreciate any insights from anyone who has dealt with a plan like this so I can realistically discuss this with the employer.

[Guest]

such a plan has no BRF as far as I know since service is not at issue. its the ACP test may fail, but thats it.

[RCK]

I agree with Tom. Assuming that you aren't doing something funny coverage wise, your only testing issue is with ADP/ACP.

You would also have a potential issue with the test results requiring a cutback in the top paid HCE contributions. I would attempt to model the test results to see if the plan passes. Assuming that is not a huge group, I'd probably model each HCE separately, and make 3 or 4 NHCE's represent the entire NHCE population. I'd guess that the results won't be what the owners or top paid are expecting.

rk

[Guest mo again]

I believe there is an effective availability issue here which must be tested based on facts and circumstances.

[Guest]

mo is correct, and I stand corrected.

[RCK]

I'm used to pretty vanilla plan designs, so I am evidently missing something. The higher match percentage is available to everyone--it's not based on service or profit center or . . . The only people who can't take much advantage of it are those at the earnings cap, who will be hitting the 402(g) limit pretty quickly.

It seems that there would be a good chance of ADP/ACP problems, but I think of that as a separate issue. Can someone educate me?

[Guest mo again]

RCK:

You are right that anyone can avail themselves of the higher match rate, so the current availability issue is a non-issue. However, the 401(a)(4) regs also require effective availability. For example, in the case of AEA's original post, if only HCE's can afford to defer in excess of 6% of compensation, there is an effective availability problem.

Does that help?

[RCK]

mo again: I understand the concept, but have no idea how I'd go about proving that anyone could or could not afford making a given level of deferral. And why doesn't the same logic apply to the base-level match?

[Guest mo again]

The same logic doesn't apply to the base level match because, presumably, everyone can afford to defer something. However, if you only matched deferrals in excess of 3% of compensation, for example, you would be dealing with the same issue.

There is no numerical test for evaluating effective availability on a facts and circumstances basis. However, in practice, if few or no NHCE's are availing themselves of the higher rate, I would be concerned.

[Guest Donkey Kong]

Mo again, if someone could not defer because he or she spent all their money on crack, would they hurt the facts and circumstances test for the original post?

[Guest mo again]

Depends on if it was highly compensated crackhead or nonhighly compensated crackhead.