We changed our discretionary monthly match during the plan year (went from $ for $ match at 3% to 0% in October 1999). Those who terminated prior to October received a distribution that included the full company match if they were fully vested. At that time we did not know we would reduce the match (and we subsequently reinstituted the 3% match in March 2000). Our administrator contends that what we did created a real problem in that some participants (those that terminated prior to October 1999)in essence received one level of match for the plan year while those that remained received a lower match. Thus, plan was discrimatory. Comments? Note that the reverse exists for 2000. Now we are hamstrung about handling any distributions.
Reg. 1.401(a)(4)-4(B)(1) does say the benefit, right or feature must be currently available "during the plan year" to an employee group that passes the nondiscriminatory classification test. However, that stops a long way from saying that the only way to run the currently available test is to create annual plan year rates of effective match divided by compensation. As the IRS' waffling back and forth on the 401(k) safe harbor match rates show, there's more than one way to interpret general testing provisions.
I'd argue that a 3% match was currently available to all employees for the first 9 months and then no match was available the last 3 months of the plan year. If this is the approach you take, you could complete the demos for your determination letter accordingly and try to obtain IRS approval.
Note that even if the administrator is right, it only shows that you would have to perform benefit, right and features testing, not that the plan was discriminatory. There's no reason why your plan needs to be hamstrung in handling distributions in the meantime.
The employees were notified at an all employee meeting in October 1999 that we were taking a number of measures to improve our financial situation and that the toughest decision was to stop the 401(k) match. But, we also told them that we hoped it would be termporary, and that we would start it back as soon as we could. Thus, we started the match back in March after only 5 months of not matching. My position is that we had a 3% match for 9 months in 1999, followed by a 0% match through February 2000 and we now match again at the 3% level and should be able to change that during the year. We know it's a discretionary match and the employees know that. But, the administrator says you can't just go changing the match during the year without messing up a lot of things. They want us to wait until the end of the year to determine what the match for that year was. This does not make sense to me. We want employees to get the benefit of monthly matches and not wait until the end of the year to make that determination. They are not even sure how to calculate the 3% match now because they say it's annual compensation that determines the match, not the monthly compensation. Comments?
In general, the right to future matching contributions is not a 411(d)(6) protected benefit. The exception is that the conditions for receiving an allocation of contributions or forfeitures for a plan year is a 411(d)(6) protected benefit after such conditions have been satisfied. Treas. Reg. 1.411(d)-4. Q&A-1(d)(8). Because Bill's original posting said the match was discretionary, I was assuming that the plan document was worded flexibly so that one could suspend the match at any time going forward, but it certainly is worth reading the plan document closely. Kirk, do you think I'm missing something?
Bill, it could be the the administrator has a point based on your plan document. If the document is worded to allocate the match based on annual compensation, suspending it for 2 or 3 months of the plan year may require an amendment. Making the amendment now after the fact may indeed be a problem. I think it's going to be hard for us to give you better guidance without being able to review the plan document.
There is nothing in the prototype document, the adoption agreement or the SPD that says annual compensation shall be used as the basis for the match. What the SPD does say is:" Each year your employer will contribute to your plan the following amounts: (a) employee deferral, (B) A discretionary matching contribution equal to a percentage of the amount of the salary reduction you elected to defer, which percentage will be determined aech year by the employer." Now, the administrators position was that it was not a problem to change the match during the plan year as I specifically asked them that question. But upon rereading this language, it makes me wonder if that was correct. All of us were thinking "discretionary" meant we could change it (either up or dowm) whenever we wanted to, but it seems that this language implies it is a yearly decision. Comments?
But you may have an issue of 'rate of match'.
mentally my mind says I do 1 adp test each year. yes, for 9 months the match rate was 5% and then 0% for the last 3 months. but when I look at the picture over the whole year, what has happened?
In other words, if someone changed his deferral % during the year, do I have to worry about the 'catch-up' on the match that I check for at the end of the year? That would be my concern.
I received the following from one prototype sponsor who was advised that changing a discretionary match mid-year is actually not a 411(d)(6) or 401(a)(4) rights and features problem but a 1.401-1(B)(1)(ii) problem:
Two IRS agents from the Cincinnati Key District Office verified that a "discretionary" match CANNOT be changed during the plan year. The reason is because changing a discretionary match violates Treasury Regulation 1.401-1(B)(1)(ii) that
states a profit sharing plan must provide a definite "predetermined" formula for allocating the contributions made to the plan. Thus, a "discretionary" match must be the same percentage for the WHOLE plan year.
They made it very clear that if the employer intends to change his matching percentage during a plan year, the matching formulas MUST be stated in the plan and the plan amended each time the formula is changed
[This message has been edited by KJohnson (edited 03-16-2000).]
My experience in this area is limited, but my general sense is that KJohnson's observation is right on--an annual discretionary match implies a consistent annual rate for all employees, and should be adjusted annually. I vaguely recall a reg (which I think is in 401(m), but which might be in the ADP/ACP safe harbor) stating that the rate of match for any HCE cannot be higher than the rate of match for any NHCE making the same election. It's possible that an HCE could get a higher match rate by maxing out in the first 9 months of the year, while an NHCE with the same election gets a lower match rate because they continue deferrals through the zero match period.
I'd also be interested in how the match formula change was documented. Bill notes that the change was announced to employees. But what was the underlying rationale for the monthly funding? A Board resolution approving periodic match for the foreseeable future, or just a "that's how we do it" understanding? Did the Board approve the change, or was the change made at management's discretion? Does the initial enabling Board resolution permit management to exercise discretion regarding the amount of the match? All these questions are important facts.
I think that this question illustrates the inherent weakness of prototype documents that don't specifically define how the match should be operated. If the document defined accrual periods, and provided for flexibility for changing match in different accrual periods, most of the potential problems would disappear.
Jon C. Chambers
Schultz Collins Lawson Chambers, Inc.