An employer (sponsoring a qualified 401(k) plan) wishes to replicate the contribution allocation provisions of a state-sponsored 457 plan by increasing the amount of matching contribution available to employees with longer service, as follows:

If the employee has 0-9 years of service and defer 3% they get 3% employer profit sharing, and 1.5% employer match (this is the maximum employer contribution).

If an employees has ten years of service or more, the match would work as follows:
Employee Deferral 3% Employer Profit Sharing 3% Employer match 2%
Employee Deferral 5% Employer Profit Sharing 3% Employer match 3%
Employee Deferral 7% Employer Profit Sharing 3% Employer match 4%

Isn't this a discriminatory contribution formula and, therefore, not allowable in a qualified plan? I thought the rate of match was not allowed to increase as the deferral rate increases or is that just a safe harbor thing?

Thanks in advance for your thoughts.

I have seen this type of chart before, and on its face it looks discriminatory, but let's look at what's REALLY being given:

Defer 3%, get a 66.67% match
Defer 5 %, get a 60% match
Defer 7%, get a 57% match

The matching RATE is dropping as the deferral rate goes up. Doesn't look discriminatory to me.

Also, is the 3% profit sharing contingent on the employee making a deferral? If so, it's treated as additional matching contribution and needs to be part of the testing as such.

If it doesn't benefit any HCE's, then I don't see any problems

I believe you have a BRF issue on the service issue. those with less than 10 years and those with more than 9 years.
if the only people with 10 years or more service are HCE you will fail. even if you have some NHCEs you could still fail.
see 1.401(a)(4)-4(e)(3)(iii)(G) 'the right to each rate of match'

Thanks again for your thoughts. The plan has no HCEs, so looks like it's something they can do. As for the design of the matching allocation in the document - any thoughts? I am suggesting they just use a discretionary matching formula and then reference an addendum which illustrates the match. I don't see how a points-based formula could work.

Any other suggestions? Thanks so much, I so appreciate having the variety of opinions and experiences to tap into here.