Can plan tie matching contribution to measurable job performance crite

[Guest KevinGordon]

In 401(k) plans, do any employers vary the matching contribution level based on employee's performance? We currently match at 50% of the first 6% of pre-tax deferrals by employees. The survey information indicates that this is probably the most common matching level. However, we see that the "2000 Hay Benefits Report" posted at 2/16/2001 indicates that while 42% of companies match in this way, 46% match at a greater level, some even more than 100%.

We might consider this, but only if the additional match were to be tied to some measurable personal on-the-job performance measures. Can a plan do this without running afoul of discrimination rules? Does anybody know of any companies which do this, and how do they do it?

[RCK]

We use a performance-based match, but it varies by profit center, not by individual. We have had cases where the profit center might have as few as 1 or two people, but in general there are several hundred. The plan has to pass coverage and ADP/ACP testing, but other than that there is not anything special.

I been around a lot longer than I'd like to admit, in a variety of circumstances, and have never seen an individual performance based match. It does seem to be doable though. I will be interested in other responses.

RCK

[rcline46]

Not only do you have to pass ACP testing, but each level of match must pass BRF testing. It would appear that personal performance would increase one's level (or two or three) and when done, that level must pass - seems a bit complicated unless determined before year end.

[Medusa]

I saw a plan where this was accomplished as follows: plan provided discretionary match for deferrals from certain bonus pay, and a different discretionary match on deferrals from all other pay. When they wanted to make a discretionary match, they simply paid the employee a bonus of this particular type (can't remember what they called it), let them defer it and then matched it at a very high rate (like 1000 to 1). In that plan, this type of bonus was paid only to NHCE's so ACP and BRF not an issue. I think I saw an article in Journal of Pension Benefits along the same lines a while back.

[Guest]

On the deferrals from bonus approach, I think Altman & Cronin Benefit Consultants, in San Francisco, can give you more detailed info. (I don't work for them, with them, etc.--I just heard Linda Cronin speak at an ALI-ABA course, and recall that she mentioned a 401(k) plan she designed that only allowed deferrals from bonuses.)

[Guest MTransue]

I actually had administered a plan at one time that had a match formula based on the years of service with the employer. It was an individually designed plan, and we had obtained a favorable determination letter.

Every year, we had to perform the ADP/ACP test, but also a BRF test as well. It was a very large client (over 30 million in assets), so it was difficult obtaining information from the client in a timely manner.

There were times when the plan satisfied ACP but not BRF, and a QMAC or refunds were necessary.

However, before such provisions were adopted in the plan (before my time), I remember seeing an extensive projection in the file, ensuring that such a feature would prove beneficial and feasible for such a plan.

I would recommend an extensive projection (as live as possible) beforehand, as well as an IRS Submission of the plan document afterwards, to ensure that it is permissible. If the IRS doesn't approve, you would have the opportunity to make adjustments/changes if necessary.

[RCK]

Correction. We do test BRF for our location based match. But something in our demographics and design means that we are always having much bigger ADP/ACP problems.

RCK

[Disco Stu]

This is only speculation, but I wouldn't jump to the conclusion that structuring the match this way would require the BRF testing.

I administer a plan that has a match with different levels based on years of service. We do BRF testing on this becasue obviously the higher rates of match are not available to everyone in the plan.

But in the scenario of basing the match on some measurable performance criteria, in theory wouldn't everyone have a opportunity to reach that top matching level?

[Alf]

I think Disco Stu is correct that no 401(a)(4) test is needed if everyone has the ability to reach each performance level necessary for the match.

But why would you need it after hearing the suggestion by Medusa. That's a brilliant way to accomplish exactly what you want to do, if you can relate the performance measure to a bonus or other payment.

[Medusa]

If the design involves HCEs, I would be wary of BRF issues. In particular, effective availability (rather than current availability) would be a concern, especially since each employee might be subject to individual performance criteria for this purpose, based on experience, breadth of responsibility, compensation level, etc. If the end result of the design is that HCEs are benefiting and NHCEs are not - well, I would not sleep well.

I am thinking more about the article I mentioned in my previous post. After racking my brain, many of whose cells have died since I read the article, I seem to recall that the structure proposed by the article involved only profit sharing, and not 401(k) at all. The concept was similar though - the allocation was based only on bonus compensation. Again, it only worked because no HCE's were part of the program. If HCE's were involved, I think you would have to general-test or prove that your compensation definition was nondiscriminatory.