401(k) with Matching Contributions
- This adds a matching contribution feature. Matching contributions are company paid contributions that relate to the amount of salary deferrals a participant makes.
- A matching contribution can be fixed by a formula, or at the discretion of the employer.
- Example of a fixed matching contribution are:
- 25% of salary deferrals for salary deferrals up to 4% of pay
- $1 for each $1 of salary deferral up to $1,000
- 50% of salary deferrals for salary deferrals up to 2% of pay, then 25% of salary deferrals for the next 4% of pay. Therefore, if a participant defers 6% or more of pay, the participant will receive a matching contribution up to 2% of pay.
- A discretionary match is decided each year by the company. In most cases the company decides on a rate of matching contribution, with a cap on the total deferrals considered.
- Flexible percentage of salary deferral considering salary deferrals up to 6% of pay.
- Matching contributions are subject to their own special non-discrimination test, called the ACP test, under Code Section 401(m). It generally parallels the ADP test for salary deferrals.
- Complicated matching contribution formulas can also be subject to an additional test, called a “benefits, rights and features” test prescribed in regulations.
- A plan can apply a “last day of the year” rule which means that participants who are not employed on the last day of the year do not receive a match. If a plan applies this rule, then there is another coverage test that must be performed.
- Matching contributions can be applied towards a top heavy minimum (see Salary Deferral only section above). However, this is most often used as a “damage control” strategy when a plan is discovered to be top heavy and has not prepared for it. This is because participants who do not receive a sufficient match to cover the full amount of the top heavy minimum, must receive additional company contributions. This applies to all eligible participants whether they make salary deferral contributions. Therefore, in this circumstance, the match looks like a profit sharing contribution since all participants can end up receiving the same of company contribution as a percentage of pay.
- In theory, between salary deferral contributions and company contributions, a participant can receive allocations of $50,000($55,500 for age 50 and older). Of this potentially $17,000 ($22,500 forage 50 and older) would come from salary deferrals and $33,000 would come from matching contributions. However, this would require a matching contribution to salary deferral rate of approximately 2:1 which is unlikely.
- In the aggregate, matching contributions cannot exceed 25% of the compensation of all eligible participants (whether or not they choose to defer).
Back to Resources