What period does the 3% employer matching contribution cover?

[Guest]

A new SIMPLE 401(k) Plan is established 7/01/00 with the proper notice to employees. The employer elects the matching formula. For determining the match amount, is it comp from 7/01/00 to 12/31/00 or the entire calendar year? In other words, an employee may defer 3% from 7/1 to 12/31, which is 1 1/2% of annual pay. Is the employer match 100% of the 6 month deferral (1 1/2% of pay) or 3% of calendar year pay? The employer wants the latter result. Alternatively, could the effective date be 01/01/00 to include full-year comp? Thanks.

[Gary Lesser]

The 3% limit is based on compensation "for the year." [see IRC 401(k)(11)(B)(i)(III)]

[Guest Lisssi]

The broker at MetLife who helped us set up our SIMPLE plan told me that the 3% per year is calculated as 3% of each *paycheck*. The employee cannot retroactively receive a higher match exceeding 3% of a particular paycheck even if earlier in the year s/he was not contributing to the plan or contributing less than 3% of the salary, and thus not receiving the full 3% match over the course of the year. This also affects employees who receive mid-year raises.

I am not sure what our broker's source was for this information.

--Liss

[Gary Lesser]

The provider of the legal advice is operating under a misapprehension. The employee can defer up to 100% of the amount they would have received in cash (after making the election), but not more than the $6,000 limit. The employer may NOT place any restrictions on this amount "(e.g., by limiting the contribution percentage)" other than to comply with the annual limit. [Notice 98-4, Question and Answer D-2]

The 3% is the LIMIT on the match. The match is 100% of what the employee elects to contribute. It does not appear that the employer has a valid SIMPLE IRA if it limits contributions to 3% of pay. The 3% limit is based on compensation for the "entire calendar year." [see Q&A D-4]

[Guest Lisssi]

Gary,

Thanks for the information-- I shall certainly look into this further.

If you are not computing the match limit by each paycheck amount, how do you go about determining the match each time a contribution is made? For example, if an employee with a salary of $40,000 (thus 3%= $1200 annually) makes contributions from salary of $500/month, is the employer match then $500 for the first month, $500 for the second month, $200 for the third month, and then no more employer contributions till the next year? Or does the employer simply contribute $100/month? And what do you do if there is a mid-year salary change?

Do you know where I can find the exact regulations you cite? I would really like to take a look at them to make sure that we are doing everything correctly-- as I had relied on the broker and the financial institution for accurate information previously about how to administrate the SIMPLE.

Thanks,

Liss

[Gary Lesser]

The matching contribution does not have to be made until the due date of the employer's Federal income tax return. The cites are the IRS Notices contained in my prior message.

If the employer chooses, it can make a dollar-for-dollar match until the 3% limit is reached. That being said, a problem could result if the employee quits and the match was based on annualized salary. So that this doesn't occur, the "ongoing" match can be limited to 3% of compensation actually paid to the date that the match is computed. It is easier (and best) to wait until the year is over.

[Gary Lesser]

The Notice (98-4) was contained in the Internal Revenue Bulletin (1998-2 IRB 25) and can be looked at or downloaded. It is located at the following address--

http://ftp.fedworld.gov/pub/irs-irbs/irb98-02.pdf

You'll need Adobe Acrobat reader to view file. Once downloaded, just right click on it in your file manager and it should open (assuming you have the Acrobat reader, which can be gotten at no charge if you don't have from Adobe; or just search for it within B/L)

[Guest Lisssi]

Gary, thank you very much for the information, it's really helpful.