May a plan offer a tiered match that provides higher rates of matching contributions at higher rates of deferrals?
E-mail Alert 2003-21 Rev. 11-7-03

Generally, no. Each rate of matching contribution must be made available on a nondiscriminatory basis. Linking match rates to deferral rates gives highly compensated employees the opportunity for a better match than nonhighly compensated employees. Those with less compensation may not be able to achieve as high a rate of deferral, making this a potentially discriminatory situation. Treas. Regulation 1.401(a)(4)-4(e)(3)(iii)(G).

Thus, for example. a matching formula such as 50% of the first 3% deferred, 75% on the deferrals between 4%-5% and 100% on deferrals in excess of 5% would not be allowed in standardized prototypes because it does not pass 401(a)(4) safe-harbor nondiscrimination testing. Theoretically, it is possible in some non-standardized prototypes, volume submitter and individually designed plans that use the general test for non-discrimination that the recordkeeper could prove that the matching contribution rates are available to a group of NHCE’s that satisfies the currently available test. However, we were not allowed by the IRS to provide for an increasing tiered rate of match when drafting our prototypes, both standardized and non-standardized.