Changing company match during plan year
Posted 13 March 2000 - 11:46 AM
Posted 13 March 2000 - 02:16 AM
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.
Posted 13 March 2000 - 03:53 PM
What about the 411(d)(6) issue?
[This message has been edited by Kirk Maldonado (edited 03-13-2000).]
Posted 13 March 2000 - 05:28 PM
Posted 13 March 2000 - 06:44 PM
Posted 15 March 2000 - 09:34 AM
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.
Posted 15 March 2000 - 06:21 PM
Posted 15 March 2000 - 06:44 PM
Posted 15 March 2000 - 06:47 PM
Posted 16 March 2000 - 09:46 AM
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.
Posted 16 March 2000 - 07:51 PM
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).]
Posted 21 March 2000 - 06:05 PM
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.