Matching Test

Even though a plan satisfies coverage requirements, it must generally also satisfy the "matching test" if it accepts after-tax employee contributions or if employee contributions are required as a condition of receiving employer "matching" contributions. If all employee salary reduction contributions are mandatory as a condition of employment or are made under irrevocable salary reduction agreements, the plan isn't subject to the matching test.

Ordinarily you must test union employees separately. Contributory retirement plans must satisfy the test at the end of each plan year, taking into account everyone employed on any day during the plan year, unless they satisfy one of the design-based safe harbors.

The test compares matching and after-tax employee contributions actually allocated to highly compensated employees (HCEs) to those contributions allocated to non-highly compensated employees (NHCEs). The plan fails the test if the actual contribution rate for eligible HCEs exceeds the contribution rate for NHCEs by more than the permissible amount, which is determined on a sliding scale.

Within each group the amount of each employee's employer matching contribution, plus the amount of any after-tax employee contribution, is used to calculate a contribution percentage of compensation. The contribution percentages for HCEs and NHCEs are separately totaled and averaged to get the average deferral percentage for each group.

Results for the two groups are then compared:

• If the average contribution percentage (ACP) for the NHCE group is two percent or less, the plan passes if the ACP for the HCE group is not more than twice the ACP for the NHCE group.
• If the NHCEs' ACP is more than two percent but not greater than eight percent, the plan passes if the HCEs' ACP is not more than two percent greater than the NHCEs' ACP.
• If the NHCEs' ACP is more than eight percent, the plan passes if the ACP for the HCE group is not more than 125 percent of the NHCEs' ACP.