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Flexible vs Rigid Matches


austin3515
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We;re just listening in on the Corbel/FIS training for documents and they are telling us about these new "Flexible" vs "Rigid" discretionary matches.  Basically you have to provide notice within 60 days of funding if there is any discretion related to the ALLOCATION of the match.e.g.., discretion regarding excluding deferrals in excess of x% of compensation, discretion regarding the computation period, etc).

Was this new requirement imposed on all document providers?  i assume it was, but would be curious to know what else is out there. IT's a pretty onerous requirement... 

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I've never understand how having a plan document allowing any discretion regarding how a contribution is allocated complies with the definite allocation formula requirement of Treas. Reg. 1.401-1(a)(2)(ii) unless there are multiple allocation groups.

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Yes, I understand that the IRS (not just for the Corbel plan document but for many others) has approved plan documents even though they don't comply with the regulation I cited.

Anyway, I can't really help you with your original question, Austin.

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I heard it too.  Now to try to write it so that notice aren't required, or that we limit the plans that it's required in.    So many notices the employees don't read them.  I don't understand the purpose of the notice as the employees cannot make any decisions on it as it's already done. 

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This expressed opinion is my own, and will not be well-received, especially by those who have been conditioned by misunderstanding and lax attention and enforcement:

The entire concept of a discretionary match is intellectually questionable (my real opinion is "bankrupt") and the IRS is remiss by letting the idea get out of hand to the point it is now normalized and difficult to recapture and restore to the original purpose.

If you want to make an ad hominem criticism, I will admit that I could never figure out how discretionary matches were legal, let alone sensible. I suffer from sumpsimus in a mumpsimus world.

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12 hours ago, S Derrin Watson said:

The other, what we called a "rigid discretionary match," specifies the computation period and allocates according to a single matching formula applicable to all participants benefiting from the match. You can change the limits on match and the match rate from year to year, but what you choose must apply universally for that year.  The rigid match (which is still much more flexible than a fixed match) does not require a communication to participants.

And this is the key, which I didn't really fully grasp during the document presentation (the brain starts to go numb after a certain amount of information packed into a session) and I thank you for highlighting this. For many of our clients, I think this will work well. For the others, well, sometimes you can't have your cake and eat it too. If you want maximum flexibility, the Notice is the price you pay. Sort of like Gateway - if you want to cross-test, that's the price of admission. (Having said that, I still think the Notice requirement, to use the technical term, sucks.) But I think FIS did a good job of providing options.

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Thank you, Derrin, for your very informative post.

17 hours ago, S Derrin Watson said:
  • The other, what we called a "rigid discretionary match," specifies the computation period and allocates according to a single matching formula applicable to all participants benefiting from the match. You can change the limits on match and the match rate from year to year, but what you choose must apply universally for that year.  The rigid match (which is still much more flexible than a fixed match) does not require a communication to participants.

Note that despite the name "rigid," this match formula still has not one but two moving variables, the match limit and the match rate.  If one didn't have an IRS opinion letter covering the plan document, it would still be problematic how this complies with the definite allocation formula requirement of Treas. Reg. 1.401-1(a)(2)(ii).  Hence, future IRS enforcement positions could change.

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14 minutes ago, MWeddell said:

Note that despite the name "rigid," this match formula still has not one but two moving variables, the match limit and the match rate.

The only "discretionary" variable is the matching rate (25%, 50%, etc.). Everything else must be defined in the document.  That way, the employer decides on an amount (say $25,000). Then, the document defines precisely who gets what amount.  Obviously. normally, we back into it the other way (that is calculate a 25% of 4% match), but that's besides the point.  You have to look at it in the other direction (i.e., declare the amount first) to understand where the IRS is coming from.

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S Derrin Watson, thank you for your excellent explanation.

 

Just curious (and mindful that your thinking doesn’t speak for FIS or another business):

 

Considering the effects and trade-off you describe, could a user’s adoption agreement specify both a “rigid discretionary match” and a “flexible discretionary match”?

 

Would that allow not needing the notice whenever the “flexible” matching contribution is zero?

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It is true I am no Derrin Watson (but equally true that he is no international man of mystery!), but if you have both, then you have the Flexible Discretionary Match and you have to do the notice.  The whole point is the document has to specify for every dollar contributed as match, who gets how much of that total match deposit.  If the client has the "flexibility" to choose either the rigid or the discretionary then that alone subjects you to the flexible discretionary rules.

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That is a logical view.  But I’ve learned enough about the realm of IRS-approved documents to recognize that often logic doesn’t control the answers.  So, I’m interested in all observations, but especially would like to learn from those who have experience in the making of IRS-approved documents.

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1 hour ago, austin3515 said:

The only "discretionary" variable is the matching rate (25%, 50%, etc.). Everything else must be defined in the document.  That way, the employer decides on an amount (say $25,000). Then, the document defines precisely who gets what amount.  Obviously. normally, we back into it the other way (that is calculate a 25% of 4% match), but that's besides the point.  You have to look at it in the other direction (i.e., declare the amount first) to understand where the IRS is coming from.

If that is the way it works, e.g. the match is a discretionary percentage of deferrals made from the first 4% of plan compensation, then there is just one moving variable.  That is a definite predetermined allocation formula and my prior post's criticism is wrong because I misunderstood Derrin's post.

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6 hours ago, Peter Gulia said:

Just curious (and mindful that your thinking doesn’t speak for FIS or another business):

 

Considering the effects and trade-off you describe, could a user’s adoption agreement specify both a “rigid discretionary match” and a “flexible discretionary match”?

 

Would that allow not needing the notice whenever the “flexible” matching contribution is zero?

Looking at the PPD document, one could, consistent with the limitations on the describe line, enter "A Flexible Discretionary Match and a Rigid Discretionary Match."  You are correct that any year the flexible formula is not used, there would be no need for the participant notice.  But say, for example, one had a rigid match computed on a payroll basis (a parameter specified in the document), and at the end of the year the employer wanted to true it up.  The true up would (only) be possible because of the flexible match, and that would require the notice.

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So formula a is x% of 4%, annual computation period. Rigid match.

formula b is flexible discretionary match.

I get to choose between the two, which means the allocation of the match is now ambiguous notwithstanding the rigid match checkbox. 
 

and not for nothing if my spd says I’ll Match on deferrals up to 4% and then I turn around and match on deferrals up to 6% that would be pretty ridiculous.

and now let’s say the rigid match is used every pay period to calc a match.  And now we want to say “ok I’d like a true up so I’m going to now switch over and say this is a flexible match.”  I do the true-up and give the notice.

so the end result of the last one is that I now get to keep the option of the annual true up under a rigid pay period match and only do the notice if I do the true-up. And again the  benefit is no true up = no annual notice. I keep all the flexibility I previously wanted with almost none of the notice requirements.  
I see this last part as the only “true benefit” because of the spd disclosures that the rigid match will require. So for example if no cap on the match was disclosed it would be unreasonable to now implement a maximum match amount under the flexible discretionary match...

man I missing anything?  I’ll have to look at the cornel doc and see if this is possible... unless derrin knows!

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I just read through the language in the Corbel Doc and I think what Derrin says about the PPD document applies to Corbel too.

"The discretionary matching contribution under this Question 29.A.a. is a “Flexible Discretionary Match” unless the Employer elects to use a “Rigid Discretionary Match.” (Choose a. if applicable.)"

So, I guess it depends on what the definition of "use" is.  It does NOT say unless the Employer elects  the Rigid Match formula below.  It just says if it USES the rigid match.  I guess the big question is going to be how to do they program it in Relius Docs.

And I suppose where my last post is ending up is, why would you ever not elect the Flexible Discretionary Match AND the Rigid Discretionary Match?

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  • 2 weeks later...

isn't it possible for the Adoption Agreement to have a cap of 6% in a Rigid Match and then have the Employer declare a formula of $.25/$1 up to 5%, for example.  Understand that the SPD would have the 6% cap listed.  The Employer could issue the notice to participants when the match formula was first declared and then not need to issue another notice unless there was a change to the formula.  

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  • 7 months later...

Does anyone have certainty on the exact timing of the communication to participants? I have seen everything from 60 days before the beginning of the plan year to 60 days after the last contribution for the plan year is funded. I realize different document providers may have different approaches, but it would be nice to know what the actual position of the IRS is.

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  • 2 months later...

BenefitsLink experts--I just ran across an article regarding this topic, and searched and found this discussion.

I work for a small TPA firm. We draft our own pre-approved documents. This issue did NOT come up during the review of our defined contribution document last year before it was approved by the IRS. We were not instructed to add any statement (as referenced in Mr. Watson's discussion above) to our approved Adoption Agreement regarding the matching contribution formulas. 

Now that I have reviewed this issue more closely, I'm wondering if our discretionary match formulas fall into the "flexible" category when the employer has the discretion to declare the portion of employee contributions which will be matched. 

Our Adoption Agreement requires that the following selections be made for each match:

1.  match rate--(a) declared by employer each year or (b) stated rate

2.  whether the formula will include tiers

3.  what portion of employee contributions at each tier which will be matched--either (a) declared by employer each year or (b) stated percentage or stated dollar amount

4.  whether there is a minimum and/or maximum match per participant--specified as (a) none, (b) stated dollar amount, or (c) stated percentage of compensation

5.  calculation period--(a) payroll, (b) monthly,(c) quarterly, (d) semi-annual, or (e) annual

6.  true-up at year end--(a) yes or (b) no

Our pre-approved Adoption Agreement also permits the Plan to have 3 separate matches (we call them "levels"), which can cover different groups of employees. So, if the employer wants to have a different match for a group of employees, that group has to be covered in a separate match level from the other participants.

Do you agree that the match formula is "flexible" if the Adoption Agreement selection gives the employer the discretion to declare the portion of employee contributions at each tier which will be matched?

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