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Truly Discretionary Matching Contribution


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9 replies to this topic

#1 PBJ

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Posted 11 June 2007 - 11:32 AM

This may seem like a very basic question, but I could use some guidance:

An employer has a basic 401(k) plan with a discretionary profit sharing contribution, no match. In an effort to increase participation the employer is considering adding a small discretionary matching contribution. It does not want to do a safe harbor because, due to the nature of its business, it cannot be locked into making a set contribution each year. So discretion in any employer contributions is key!

Can the matching contribution be truly discretionary so that the plan document only reserves the right to make a discretionary matching contribution annually and the SPD discloses that a match is possible?

Must the employer set out some type of formula, cap, or upper limit??

Also, can the employer add the matching contribution to the plan mid-year (i.e., Beginning June 1, 2007, the employer may make a discretionary contribution) or must it implement it at the beginning of the plan year (i.e., January 1, 2008)?

Thank you!!

#2 J Simmons

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Posted 11 June 2007 - 02:08 PM

Yes, a truly discretionary match can be added to the plan. If the highest 401k deferrals by a key EE for a plan year that the plan might be top heavy is less than 3%, making a discretionary match could trigger a higher top-heavy minimum required contribution. However, that impact could be determined before any discretionary match is in fact declared or made. The ER can make that decision after the plan year has ended, and the actual 401k deferrals by key EEs is then known.

"...formula, cap or upper-limit" required? Cap or upper-limit, no. And it doesn't make sense to do so. The match is discretionary. Imposing a cap or upper-limit only hampers that discretion that the ER will have in deciding how much, if any, to discretionarily match for a plan year. As for a formula, yes, you'll need one, and most plans simply specify that the ER's discretionary match is allocated in proportion to the 401k deferrals made for the plan year.

Yes, you can amend and add discretionary match as an option mid-year. Check your documents--it might already be in there, just never having been used before.
John Simmons
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Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

#3 JanetM

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Posted 11 June 2007 - 02:15 PM

My experience has been that this won't increase participation. If a discretionary match is made on payroll basis and the participants can see it immediately - yes that may increase participation. But to say you might make contribution - you are also saying you might not.
JanetM CPA, MBA

#4 Jim Norman

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Posted 11 June 2007 - 02:24 PM

What JanetM said. A match has to be communicated up front to be effective.

Also, a match declared after the end of the year can create hard feelings. An employee finds out after the fact that his deferral would have been matched, but he did not defer and now has no ability to go back and change this.

I recommend match be looked at as an employee benefit and an incentive to defer. Communicate it up front and contribute it per pay period. If the situation changes and the employer can no longer afford the match, stop it on a go forward basis only and communicate this to employees.
I'm addicted to placebos. I could quit, but it wouldn't matter.

#5 fender5150

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Posted 11 June 2007 - 04:49 PM

Jim and Janet could be right, but your company history might help:
Do you have a history of funding your discrionary Profit-Sharing contribution? If so, you have a chance of encouraging people to join your plan with the discretionary match.

I don't see this as a basic question at all. The underlying issue is - Where will the company's benefit dollars create the best impact.

This is completely my opinion; of course. I offer it as a CFO with 20 years experience writing compensation plans and helping private companies grow. Here's a (non-exhaustive) list of discretionary benefits in order of effectiveness - This list is on a cost-benefit basis:

Bonus - Money in hand is better than anything else, in my opinion; even though the Government takes a big portion of it.

Company event - If you have a good event planner, these things can go a long way. The favorite event of a previous company is a trip to the Horse Races. We'd rent a room and give everyone $100 to gamble with. Company events are cheap compared to the other items on this list.

401k match - I'm putting this down even though you said it wasn't an option, just to put it in order - subjective as this exercise is!

Discretionary 401k match - Only those who are retirement minded will appreciate this. If you have a history of funding discretionary payments, this stands a good chance of encouraging participation. Tell the company upfront that if the company does well there will be a discretionary match fro those who participate in the 401k plan - You should also consider doing a discretionary bonus - but I'm not suggesting you spend more than you did in the past.

Gifts / Awards - Singling someone out has some benefit - Some.

Almost anything else - Other than the last item on the list.

Profit Sharing - This doesn't provide a great deal of good will, especially for employees who are not retirement minded. I think you've already figured out (that Profit Sharing contributions aren't very popular with the troops). I imagine that's part of the reason you're considering other options.


This E-mail is getting long, but I want to add one more thing. If you do a discretionary match, that's funded on every paycheck, you could be providing immediate feedback regarding the financial stability of the company. I bring this up for consideration, not to say that it's a good thing or a bad thing. Some company's like to manage information that is given to the troops, others like to let it all hand out.

I hope this was helpful!

Fender5150
Thanks,

Fender
www.401ktest.com
www.ProjectedFinancialStatements.com

#6 PBJ

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Posted 11 June 2007 - 05:00 PM

Thank you all. Your guidance and insight is incredibly helpful!
:)

#7 401 Chaos

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Posted 30 October 2008 - 03:33 PM

Can I ask a dumb question that I thought I knew the answer to but am not sure and did not see directly addressed in a search here.

With a true discretionary match, can the employer terminate / discontinue it mid-year? I assume so although presumably some notice must be given in order to give participants a chance to adjust. Would the 30-day period required for safe harbors also apply to non-safe harbor plans or would informing before the start of the next payroll period (for a payroll period match) be sufficient.

Also, if the SPD says that "Each Plan Year, the employer may provide for a discretionary match" or something similar lock you in to possibly having to stick with the Plan Year match for the entire Plan Year?

#8 BG5150

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Posted 31 October 2008 - 08:00 AM

Though it may not garner a ton of goodwill, have you thought about some sort of automatic enrollment? Start off low, so the people may not be hit that hard with a small reduction in pay.

Does the plan have a financial advisor linked with it? Could the FA/agent come in and give a pep talk/info session for the employees highlighting the importance of getting into the plan?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.


#9 K2retire

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Posted 02 November 2008 - 10:56 PM

Can I ask a dumb question that I thought I knew the answer to but am not sure and did not see directly addressed in a search here.

With a true discretionary match, can the employer terminate / discontinue it mid-year? I assume so although presumably some notice must be given in order to give participants a chance to adjust. Would the 30-day period required for safe harbors also apply to non-safe harbor plans or would informing before the start of the next payroll period (for a payroll period match) be sufficient.

Also, if the SPD says that "Each Plan Year, the employer may provide for a discretionary match" or something similar lock you in to possibly having to stick with the Plan Year match for the entire Plan Year?


With a true discretionary match, the decision to match is often not be made until after the end of the year. Consequently, it would be difficult to give any sort of notice mid year.

If the document says that the match is made on a per plan year basis, then it must be done based on the whole year's compensation. So you adjust -- since it is discretionary, you may end up matching the first 2% of pay for the whole year instead of the first 4% for the first half of the year, for example. Yes, this will potentially change who gets how much, but should keep the total dollars about the same.

#10 401 Chaos

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Posted 02 November 2008 - 11:02 PM

Thanks very much. In this case, the match has been made on a pay period basis and there is no true up. The plan seems to be drafted in all respects to base the match on pay period amounts but the SPD has the language about the discretionary match being made each plan year--although again the plan docs seem to make clear nothing is really on a plan year schedule.

Seems I just saw news article about GM cutting matches after October 31 for non-union employees so we must not be the only ones in this situation.