(b)lines Ask the Experts – Non-Discrimination Rules for Match Contributions

August 2, 2011 (PLANSPONSOR (b)lines) – “I realize that the nondiscrimination rules for employer base/nonmatching/discretionary contributions were dramatically changed by the final 403(b) regulations, but what about the rules that apply to matching contributions?”

Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:  

There was a subtle change in the non-discrimination  rules that applied to matching contributions, though not nearly as dramatic as the changes to the rules governing base contributions. Section 1.403(b)-5 of the final 403(b) regulations, which were generally effective in 2009, is quite explicit that 403(b) employer matching contributions must pass all nondiscrimination testing applicable under qualified plans, including coverage testing under Section 410(b) as well as the Average Contribution Percentage, or ACP, test under Section 401(m).  

Prior to the effective date of the final regulations, though there was a Code requirement that employer contributions be nondiscriminatory (Section 403(b)(12)(i)), there were no regulations that stated precisely how the requirements were to be satisfied. Instead, we had a Notice, (Notice 89-23) that identified how plans could comply with 403(b)(12)(i); namely, if plans operated within a “reasonable, good faith interpretation” of that Section.  

However, the Notice goes on to state that compliance with 410(b) and 401(m) for employer matching contributions would be considered a “reasonable, good faith interpretation”. Thus, as a practical matter, many 403(b) plans with 403(b) matching contributions conducted 410(b) coverage and ACP testing under 401(m) prior to 2009, and continued to do so after 2009, though the standard for performing such testing became more rigorous with the advent of the final 403(b) regulations.  

It should be noted that such nondiscrimination rules do not apply at all to 403(b) governmental or 3121(w) “steeple” church plans, or plans that do not benefit Highly Compensated Employees (currently defined as those employees who earned in excess of $110,000 in 2010.)  


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.