safe harbor match plus discretionary match

I have found a few prior threads on this board, but the outcome is still a bit unclear. The EOB references an IRS response from the 2012 ASPPA conference, but the book does not take a strong stance:

A 401k plan is written with a safe harbor match formula of 100% of the first 4%. The plan allows for discretionary match. The plan sponsor wants to fund an additional 2% discretionary match so employees who defer 6% receive a 100% match. However,  I see this as two separate formulas:

1. safe harbor match is 100% of the first 4% deferred

2. discretionary match is 0% of first 4% deferred, 100% of next 2% deferred

Therefore, I believe they are subject to the ACP test because of IRC §401(m)(11)(B)(ii) where the rate of match cannot increase as deferrals increase. One of the large record keepers disagrees. They say this approach complies because the formulas are in a sense "aggregated" and the match is uniform and does not increase as the rate of deferrals increase.

Does this match formula indeed satisfy ACP?

Thank you

the example in your handy dandy the ERISA Outline Book Chapter 11 Section XIV part E.5

has:

5.a. Plan which provides additional match . If a plan provides matching contributions described in 3. or 4. above, but also makes additional matching contributions , the employer will have to determine whether all of the matching contributions combined (including the match described in 3. or 4. above) satisfy the formula requirements for the ACP safe harbor, as described in 1. above. If they do, then no ACP test is required on the matching contributions. If they don't, then the ACP test will need to be run. When running the ACP test, certain contributions may be disregarded. See the special testing rules described in 8. below.

5.a.1) Example. A 401(k)(12) safe harbor plan provides two matching contribution formulas. One formula provides a match of 100% on the first 3% deferred plus 50% on the next 2% deferred. This match is 100% vested and subject to the withdrawal restrictions described in Part C of this Section XIV. The second formula is a discretionary match, which is subject to a vesting schedule, and which is a uniform percentage of the first 5% deferred, as determined by the employer, but the match is capped at 4% of compensation. For the current plan year, the discretionary match is 30% of the first 5% deferred. Formula one qualifies the plan for the 401(k)(12) safe harbor, because it is the basic formula described in IRC §401(k)(12)(B)(i) (see 3. above). Therefore, the elective deferrals do not have to be tested under the ADP test for this plan year. To determine if the ACP safe harbor is satisfied, the combined match under both formulas must be examined under the ACP safe harbor requirements described in 1. above. The two formulas combined provide a participant with a total match of 130% on the first 3% deferred and 80% on the next 2% deferred. This satisfies the formula requirements for the ACP safe harbor. In addition, since the second formula is discretionary, it must be capped at 4% of compensation (see 1.d. above) to qualify for the ACP safe harbor, which it does. The plan satisfies the ACP safe harbor with respect to all of its matching contributions.

Probably for clarification purposes could have added

suppose he makes 100,000

ee receives 130% on the first 3%   (130% * 3000 = 3900)

80% on next 2% (80% * 2000 = 1600)

total match = 5500 which if 5.5% of total pay. but it is the discretionary match which is limited to 4% not the total match. the discretionary match was on 30% * 5000 = 1500, only 1.5% so under the 4% of comp limit. In addition the match was capped at 5% deferred, could have been as high as 6%.

In the first example, the discretionary match applies to the first dollar again. The below example ignores the first 4% under the discretionary match formula similar to the original question??

5.a.1)b) Example - enhanced match on first 4% of compensation with discretionary match on higher levels of compensation. A safe harbor 401(k) plan provides a 100% match on the first 4% of compensation deferred. The employer also wants the discretion to contribute an additional amount on deferrals exceeding 4% of compensation but not more than 6% of compensation, limiting the rate of the discretionary match to 100% of such deferrals. When presented with this example at a Q&A session at the 2012 ASPPA Annual Conference, the IRS stated that this would not satisfy the requirements for the ACP safe harbor. The enhanced match formula of 100% match on the first 4% of compensation deferred is used to satisfy the ADP safe harbor, and the discretionary match cannot be combined with the enhanced match for ADP safe harbor purposes. Thus, the discretionary portion must be separately analyzed and it fails the requirements for the ACP safe harbor because it doesn’t match deferrals below 4% of compensation. In other words, where a portion of the match is used to satisfy the ADP safe harbor, the remaining match also must be able to stand alone under the ACP safe harbor. Where that formula is discretionary, it must allocate matching contributions starting at the first dollar of elective deferrals and otherwise meet the requirements for the ACP safe harbor. The IRS didn’t provide a citation to support this interpretation of the law. Treas. Reg. §1.401(m)-3 does not explicitly state such a rule. The IRS’ concern, although not expressed in the Q&A session, might be that where the discretionary match applies only to deferrals above a certain level, the employer may decide to make the discretionary match only when only HCEs are deferring at such levels or only a low percentage of NHCs are doing so. Note that in the example in 5.a.1)a), each matching formula could individually satisfy the requirements of the ACP safe harbor, so the IRS apparently wouldn’t challenging the analysis shown in that example, even though all of the matching contributions (including those used to satisfy the ADP safe harbor) are combined to demonstrate compliance with the ACP safe harbor. Note, too, that the IRS did not take the position that the discretionary matching formula caused the fixed formula to fail to satisfy the ADP safe harbor. It was just the ACP safe harbor that was failed.

I agree with the recordkeeper, not the original poster.

The rule is in Treas. Reg. Section 1.401(m)-3(d)(2):

"Matching rate must not increase. A plan that provides for matching contributions meets the requirements of this paragraph (d) only if the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee's elective deferrals and employee contributions, does not increase as the amount of an employee's elective deferrals and employee contributions increases."

I have no difficulty in interpreting "matching contributions" in that regulation as applying to all of a plan's matching contributions.  If the IRS had intended "matching contributions other than the safe harbor matching contributions," then that's what they what have written.

Ask yourself this: if you think that "matching contributions" in 1.401(m)-3(d)(2) means "matching contributions other than the safe harbor matching contributions," are you consistently interpreting the phrase "matching contributions" the same way elsewhere in 1.401(m)-3? 

this is one of those debatable issues - well sort of. Personally, I think the regs say you test everything together to make that determination.

At the 2012 ASPPA conference the IRS response was "NO" because one of the formulas would fail when tested separately. (Q and A #45)

In 2013 the response was a little more vague, if the discretionary match was implemented in such a way that it could fail safe harbor (e.g. not capped). Q and A #21. But that doesn't address the issue of whether or not you look at each match separately or as a whole.

Then, (I wish I had thought about it at the time) the IRS response shoots itself in the foot with the next Q and A - #22. Can you have a basic match for NHCEs only and a discretionary for HCEs only? The response was YES assuming the discretionary meets the other requirements. But how does the discretionary pass by itself if no NHCEs receive? it doesn't. So it would be impossible to have that as a plan design and still answer YES. or the rule on rate of match applies only to the overall combination of all matches.

Of course we know that such responses at the Conference do not reflect an actual Treasury position.

The regulatory concern here is the discretionary match decision seems to be made after the end of the year and may not have been communicated at the time of 2017 elections (as would be the case with the safe harbor notice before the beginning of the year).  If, after the end of the year, the additional match for 5-6% contributions was made based on HCE deferrals greater than what's provided for NHCE, the benefit formula would enrich HCE's and not meet safe harbor.  It would be considered "foreknowledge" if HCE's were the majority of participants able to contribute 5-6%.

Hi to all!  I'd like to tack my new question on to this old thread because they related to each other and even though I have read this 5 times I am still not sure how to handle my situation.

I have an employer who wants to motivate his employees to defer more and in his ideal world they would defer 15% of pay and he would match 10%.  No, for real, I really do have someone this generous!  For 2019 he has already distributed a SH Match notice promising the employees dollar for dollar up to 6% of pay - already really generous.  He's trying to figure out how to structure a discretionary match on top of the SH for 2019 that would reward employees who put in more than 6% of pay, in such a way that if someone put in 15%, they would end up with a total of 10% in employer match.  He understands that at least some if not all of the match would be subject to the ACP test and that if the test fails, refunds might have to be made, and he doesn't care.

At first he, and we, were thinking that he could do a discretionary match of 44.44% on deferrals between 6.01% and 15% of pay.  For the guy who defers $15,000 on a $100,000 salary, this would get him a $6,000 SH match plus a $4,000 extra match for a total of $10,000.  

Then we started reading passages about having to calculate the discretionary match on all of the deferrals, not just the percentage over 6% of pay.  In that case, the extra match would be 26.66% of all deferrals up to 15% of pay deferred.  This would get our $100,000 person the $6,000 in SH Match plus the extra $4,000 in discretionary match for a total of $10,000.  However, of course, it would increase the cost of the lesser paid/lower deferring people.  I don't think this employer minds doing this, if the rules require it.  He just wants to know what to do within legal parameters to achieve his goal.

So here we go:

1. Must we structure the discretionary match to include all deferrals from the first dollar

2. What exactly goes into the ACP test?  The discretionary match only, or the total match including the Safe Harbor?

We mostly deal with employers who won't even pay a Safe Harbor match, let alone do more, so it just hasn't come up before.

Thanks in advance for helpful advice!