3804 / What special rules apply to employer matching contributions? What rules apply to employee contributions?

A defined contribution plan that provides for employee contributions or matching contributions, typically a 401(k) plan ( Q 3753), must satisfy the Actual Contribution Percentage (“ACP”) test or one of the alternatives to it ( Q 3805) to meet the nondiscrimination in amount requirement of IRC Section 401(a)(4).¹ With respect to matching contributions only, two alternative plan designs are available that are deemed to satisfy the ACP test: a SIMPLE 401(k) plan ( Q 3778), or a safe harbor design ( Q 3773).² In plan years beginning after December 31, 2007, a “qualified automatic contribution arrangement” will satisfy the ACP test requirement with respect to matching contributions ( Q 3762).³

Matching contributions are subject to a three year cliff or five year graduated vesting schedule ( Q 3869).

A plan will not be treated as violating the ACP test merely on account of the making of, or the right to make, catch-up contributions by participants age 50 or over under the provisions of IRC Section 414(v) so long as a universal availability requirement is met ( Q 3761).⁴

All after-tax employee contributions are subject to ACP testing even if one of the design-based alternatives is used. After-tax employee contributions for this purpose do not include designated Roth contributions ( Q 3779). The term also does not include rollover amounts, repayment of loans, or any other amounts transferred from another plan.⁵

The contributions that are required under a safe harbor plan ( Q 3773) may not be used to satisfy the ACP test for after-tax employee contributions. Any employer matching or nonelective contributions in excess of the amount required to satisfy the safe harbor rules for a qualified cash or deferred arrangement can be taken into account for purposes of satisfying the ACP test.⁶ Voluntary after-tax employee contributions that give rise to the Saver’s Credit ( Q 3648) may be taken into account for purposes of satisfying the ACP test.⁷

Of course, the plan must satisfy the general nondiscrimination requirements applicable to all qualified plans ( Q 3848). In particular, the availability of matching and employee contributions, as well as any other benefits, rights, and features under the plan, must be nondiscriminatory ( Q 3860).⁸