Can match formula be independent of amount of deferral?

[John A]

Can a matching formula be independent of the amount deferred? For example: 3% of compensation contributed to match source if there is any deferral at all, no contribution to match source if no deferral.

Why or why not?

[Guest yrbkr]

I'm not sure I understand your question. The employer can make a contribution regardless of what the ee defers.

[John A]

yrbkr,

By definition:

The term “matching contribution” means any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee contribution made by such employee, and any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee's elective deferral.

So a contribution that is made even if the employee defers nothing (and does not make an employee contribution) is by definition not a matching contribution.

I have always seen matching formulas stated as a % that depends on the amount the employee defers or contributes (e.g., 50% of deferrals up to 6% of compensation).

My question is whether the amount of the matching contribution for an employee can depend only on whether or not the employee defers, and not depend on the amount of the deferral.

[KJohnson]

The requirement is that the matching contribution be "on account of" an employee contribution or "on account of" an elective deferral. If you have a reg book, look at 1.401(m).1(f)(12).

[John A]

KJohnson,

It seems clear under that definition that a contribution that is made only if the employee defers is a matching contribution. The definition says only that the match must be "on account of the deferral" and says nothing about the amount of the deferral.

So would you say from this that the amount of the match can be independent of the amount of the deferral (for example, employer will contribute 3% of compensation to match source for any employee that defers 1% to 15% of pay, will contribute nothing if employee does not defer at all)?

[david rigby]

Could question John. I agree with your interpretation of "on account of". I'm not aware of any requirement that the match be some percentage. I wonder if such plan design will help or hinder passing the ADP test.

[R. Butler]

It is an interesting question. Couldn't you actually draft it as a percentage of comp.? Couldn't you could say 3 to 1 on the first 1% or 6 to 1 on the first .5% of deferrals.

[John A]

R. Butler,

Thank you. I believe you are correct. You can probably always get to the result I inquired about through appropriate wording.

[KJohnson]

I looked at this question regarding a plan that "offset" the amount of match against the profit sharing contribution made by the employer. The plan provided a 3% of comp profit sharing contribution and then matched 100% of deferrals minus the profit sharing contribution made for the employees. The upshot was that you didn't get a match until after you had deferred 3% of comp. I wondered whether factoring in the profit sharing contribution would conflict with the "on account of" language. I came to the conclusion that since only individuals deferring were receiving the match, it was still o.k. and "on account of" the deferral. (I also looked at effective availabiity issues as well as, of course, the ACP test rammfications--they did pass).

[Alf]

I understand that every different rate of match is a benefit, right, or feature under the 401(a)(4) regulations, so wouldn't each group of people at each level of deferrals have to satisfy the 401(a)(4) testing requirements?

[KJohnson]

Alf, if you are referring to my example, I think that is right. However, the test is whether the level is "currently available" or "effectively available." It is "availability" that is tested. Thus, if everyone is allowed to defer to receive the various levels of match, there should be no current availability problem.

Also, this is not the type of situtaion raised in the examples in the regs that would raise an effective availability issue. However, "effective availability" is a facts and circumstances test and there maybe scenarios where "effective availability" could be a problem even though all participants are allowed to defer to reach the various levels of match. Your ACP test, however, is probably a pretty good "hedge" against there being a effective availability problem. If only HCEs are receiving an increased level of match based on increased deferrals then you are going to have a tough time passing ACP.

[Richard Anderson]

KJohnson,

Did you get a D letter for this "offset" plan? The plan has little or no incentive for someone to defer 1, 2 or 3 percent. But, it could "force" participants to defer more than 3%, because they won't get a match at any lower deferral rate. Was this the driving force on the plan design, and is it working as planned? Is the ps contribution discretionary? If so, is the allocation of the match "definitely determinable." Why not just have the matching language state that only deferrals over 3% of comp will be matched? What is the advantage of the "offset" language? Interesting plan design.

[Guest Jeff V]

My opinion:

I would think if you incorporate the provisions for the employer match into your plan document and obtain a plan qualification letter (determination letter), you'll be fine, provided:

The test for a defined contribution plan, to ensure non-disqualification of a company match, is section 401(m)(2). I think if you pass this test with respect to HCE's (defined in 414(q)), you should be able to formulate your matching formula any way you like.

A defined contribution plan is defined in IRC 414(i) - ..."the term ''defined contribution plan'' means a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account.