Cycle 3 Discretionary Match Communication

[Patricia Neal Jensen]

Everything in this makes sense except for the timing of the notice to Participants:

"... within 60 days following the date the discretionary match is made to the plan."

Why would the notice come after the match is contributed?  Wouldn't it make more sense to have the notice precede the match?

 

Thanks!

Patricia

 

[Doc Ument]

I often don’t see these posts until days later, but since no one has responded to you and you are still following this, I will give you my two cents. (That’s another way of saying that if you respond, it might be a while before I see your response.)

 

While it is true that many employers make a discretionary match every payroll, even they do not know how much the contribution is going to be if they are not using each payroll period as the matching computation period, since there will be a potential true-up owed after the end of the year. Many other employers won’t put any money in. Many participants won’t share in earlier contributions if they leave during the year and there is a requirement that they be employed on the last day of the year to get an allocation.

 

As I understand it, document providers wanted a preserve having discretionary matching contribution allocations after the IRS said they were taking that away. So the providers proposed to the IRS that the IRS allow such discretionary allocations in the same way that nonelective contributions are made “definitely determinable” for a cross-tested plan, i.e., by putting the formula (or the arbitrary amounts) in writing. The IRS said “okay, but since this is a match, you need to tell the participants how much the employer decided to allocate for the plan year.” So many employers don’t know how much they are going to contribute until, say, the tax deadline after the end of the plan year. Under the regulations (and some documents), matching contributions can be as late as the end of the year subsequent to the deferrals for purposes of the ADP/ACP test. So in order to have a simple universal deadline, the IRS and at least one Provider agreed upon a notification to participants within 60 days of when the employer declared its last matching deposit for a particular year, at which point that became a standard that presumably ever provider now needs to meet.

 

For PPA documents, participants didn’t’ get any notification of how much was allocated to them for the plan year as a discretionary nonelective contribution or as a matching contribution. So they’ve been making deferral decisions knowing only that there might be a match. Their SPD might say that the amount of their match will be a discretionary amount. This will be a step up.

 

To put it another way, this is not a law where Congress thought about the best approach for informing participants as to make to make the best elective deferral decisions for a coming year. It is an IRS policy to make employers “definite” as to which deposits over the past dozen or more months they are associating with a particular year’s discretionary match, and having done that, how much of that overall amount is going to each participant (e.g., a formula, a list, whatever). Or, the employer can choose to make the allocation formula "definite" in the document, and then no notification is required.