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Towanda

Discretionary Match - Document Failure or Operational Failure?

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The plan sponsor's Adoption Agreement (adopted in 2016) provides for a Match formula of 100% of the first 3% of  deferred compensation.  The TPA treated this Match as being discretionary, but entered the formula in the document in the event that it would be made.  The "Discretionary Match" box was not checked, and my understanding is that a single Match is either fixed or discretionary anyway . . . not both.

Because this Match was treated as being discretionary, it has not been provided in the years since adoption.  The plan sponsor has been making a 3% SHNEC + discretionary Profit Sharing instead.

Does the plan sponsor have a document error or an operational error?

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18 hours ago, Towanda said:

The TPA treated this Match as being discretionary, but entered the formula in the document in the event that it would be made.

Towanda, I'm having difficulty understanding what the above sentence means.

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Luke Bailey... I think the confusion results from the TPA not understanding the rules about the language in the document.  This match is not discretionary.  It is written into the document.

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1 hour ago, Patricia Neal Jensen said:

Luke Bailey... I think the confusion results from the TPA not understanding the rules about the language in the document.  This match is not discretionary.  It is written into the document.

Patricia Neal Jensen,  that explains the first part of the sentence, but not the latter part, "in the event that it would be made." I'm still puzzling over what Towanda may have meant there. What I'm trying to get at is whether there is any reasonable argument that the employer's intent was clear that the match was discretionary, and perhaps the Adoption Agreement was not clear or was interpreted by the employer in an unusual, but permissible, way. That could lead you down a better correction path if all the stars line up.

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Towanda, you are correct, a match cannot be both fixed and discretionary, and what’s more, regardless of how the AA was completed, and regardless of whether the match is fixed or discretionary, the document does not have a document error solely because the employer or drafter intended one thing but the AA, as completed, says another thing. That is a “drafting” error, and as such, is not the subject of any correction program such as EPCRS. The term you may be looking for is a scrivener's error, but that is a whole other can of worms way beyond your simple question.

 

A document error is typically reserved for the situation when the document fails to adhere to legal requirements, such as when, for example, the plan is out of date (e.g., required interim amendments have been missed) or the employer or drafter selected conflicting provisions or failed to provide all required specifications. In contrast, an operational error would arise if the employer fails to administer the plan in accordance with the AA, such as failing to contribute any match that is required to be made each year under the terms of any selected AA option that so states.

 

I can imagine an AA option that would say "a discretionary contribution, which, if made, shall always be X% of the first Z% deferred," which I gather is what was intended here. But most providers don't provide that option because it is probably not in high demand. If the AA had an option for filling in a blank to describe the matching formula, then that might have been an appropriate place to make such a statement. Most employers are content with a "discretionary" amount as a percentage of deferrals, typically with a "discretionary" cap on deferrals, and that combination would have been sufficient to enable this employer to choose between no match and, only if the employer wanted to, a match of 100% of the first 3% deferred.

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Somehow I was not notified that there were responses to my question, so thank you for your response!  Very helpful!

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