match formula based on compensation bandwidths

Plan sponsor wants to provide a greater match formula for lower paid participants. For example:

1. 1. Tier 1 – if you make < $45,000 your match is 100% on 5%
   2. Tier 2 – if you make > $45,000 < $75,000 your match is 75% on 5%
   3. Tier 3 – if you make > $75,000 < $125,000 your match is 50% on 5%
   4. Tier 4 – if you are a HCE your match is 25% on 5%

Let's assume the match is based on plan year comp (not funded per pay period) so at the end of the year you know which category each participant is in. If the plan passes BRF for both current availability and effective availability, then is this acceptable (pending ACP testing)?

Is this type of match formula possible within the regulations? If so, we obviously need to make sure our document allows for it. Our document allows for us to write in tiers, but I am not sure that tier section means compensation bandwidths.

Thank you

From a nondiscrimination stand point if you pass ACP hard to see where that would fail the BRF test. As long as you can write it into your document you should be fine. Though you might need amendments from time to time as the HCE comp limit changes.

One thing to think about is how you will handle a conflict if an HCE terminates early in the year and makes say $30K are they in Tier 1 based on comp or Tier 4 based on being HCE due to prior year comp? It might be moot if you have last day requirement on the match though that is also the one area where 410(b) testing could come into play if you have high turnover.

You're allowed to discriminate in favor of one NHCE over another NHCE and you are always allowed to discriminate against HCEs.

Second Lou S.'s response, in case you want added support.

Make life easier on yourself and change Tier 4 to >/= $125,000. Then, no need to redefine Tier 3 periodically.

Re Lou S excellent comment. Same issue could be relevant for someone during their first year of employment (in addition to last if no end-of-year-employment requirement). To avoid even remote possibility of problems (& it is really remote), you may want to clarify that tier assignment will be based on rate of compensation for less than full year employees. For example, someone with comp of $50,000 working 4 months will be treated as having comp of $150,000 for this Tier-assignment purpose only.

I would reword the tiers.  For the first 3, I would add "if you are an NHCE..."

For tier 4, I would change it to "if you are an HCE OR you make more than $125,000..."  

Because why you have there, an NHCE who makes more than $125,000 would get no match at all!

Also, I would put some >= or <= rather than all >'s and <'s, because if anyone has income on the button, they get no match.  For example, if someone makes exactly $45,000, then they don't fit into either 1 or 2.