Questions About Excluding Some Deferrals From Matching Contributions

“I currently work with an ERISA 403(b) non-safe harbor plan that matches 100% of the first 3% of elective salary deferrals. The plan sponsor wishes to change the formula so that only employees who defer at least 3% of pay receive the 3% employer contribution. Thus, unlike the current formula, if an employee deferred 1% or 2%, the employee would not receive an employer contribution. Is the proposed formula possible? And, if so, would the 3% employer contribution still be considered a matching contribution for ACP testing purposes?” 

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Yes, the proposed formula is possible, since there is nothing in the Internal Revenue Code or the Employee Retirement Income Security Act (ERISA) that would prevent the use of such a formula, provided that all nondiscrimination testing is satisfied. However, the answer to your second question, as to whether the proposed 3% contribution is still considered a match for actual contribution percentage (ACP) testing purposes, is a bit more complicated. Treas. Reg. Section 1.401(m)-1(a)(2)(ii), which defines matching contributions as applicable for ACP testing purposes, provides as follows:

“(ii) Employer contributions made on account of an employee contribution or elective deferral. Whether an employer contribution is made on account of an employee contribution or an elective deferral is determined on the basis of all the relevant facts and circumstances, including the relationship between the employer contribution and employee actions outside the plan. An employer contribution made to a defined contribution plan on account of contributions made by an employee under an employer-sponsored savings arrangement that are not held in a plan that is intended to be a qualified plan or other arrangement described in § 1.402(g)-1(b) is not a matching contribution.”

The problem here is with the words “on account of,” which are not defined in this Section but are determined on the basis of all the relevant facts and circumstances. In general, the words “on account of” have been interpreted to mean that, if the contribution would not be made were it not for the elective deferral, it is considered to be a matching contribution, which would be the case for your proposed 3% employer contribution that can only be made if the employee defers 3% or more of salary. The proposed contribution as described certainly seems to be “on account of” the participant making a 3% elective contribution. However, given the ambiguity of the language here, you should probably confirm with retirement plan counsel whether the proposed 3% employer contribution is indeed a matching contribution for ACP testing purposes.

It should also be noted that, if the 3% employee contribution was a MANDATORY contribution, either as a condition of employment or due to a one-time election whether or not to participate in the plan, the 3% employer contribution would NOT be a matching contribution and would thus not be subject to ACP testing.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.