Understanding regs for payroll period method in SH plan

[Guest Miller426]

Q-2. Can a 401(k) safe harbor plan match elective and employee contributions on a payroll-by-payroll basis (instead of on an annual basis) without making additional contributions at the end of the year to take into account the total amount of an employee's compensation for the plan year?

A-2. Notwithstanding section VII.A. (or any other provision) of Notice 98-52, the requirements of sections V.B.1. and VI.B. of Notice 98-52 that relate to matching contributions may be met for a plan year by meeting such requirements either (1) with respect to the plan year as a whole, or (2) if the plan so provides, separately with respect to each payroll period (or with respect to all payroll periods ending with or within each month or plan-year quarter) taken into account under the arrangement for the plan year (the "payroll period method"). If the payroll period method is used, however, matching contributions with respect to elective or employee contributions made during a plan year quarter beginning after May 1, 2000 must be contributed to the plan by the last day of the following plan year quarter. Accordingly, in the case of a calendar year plan that uses the payroll period method, matching contributions with respect to elective or employee contributions made during the calendar quarter beginning July 1, 2000, must be contributed to the plan by December 31, 2000. The payroll period method applies only for purposes of satisfying the ADP safe harbor matching contribution requirements of section 401(k)(12) (section V.B.1. of Notice 98-52) and the ACP safe harbor matching contribution requirements of section 401(m)(11) (section VI.B. of Notice 98-52).

the above copied from IRS Notice 2000-3 on Safe Harbor 401k Plans

It seems simple questions just lead to more confusion. How does any Retirement Plan career enthusiast stay sane??

HR had communicated to me through email that our safe harbor match is payroll based but the notice that was provided after our recent plan conversion says it is based on compensation annually. I wanted clarification and was told it was payroll based because they make the match each payroll period. I asked if a corrected notice would be provided and was told it was believed there would be a corrected notice and that one had been requested from the service provider. Since the answer to the question impacts whether or not I decide to increase my deferral percentage in the next pay cycle and the SPD was not clear and my opportunity to change my election is soon to expire for the next payroll period and because I had thought it needed to be explicity stated in the plan if it was payroll based I asked to review the plan document and adoption agreement so that I could be sure one way or the other. As it turns out the AA/BPD is also unclear. There does not appear to be anything that explicity states either that the match is annual or that it is payroll based. HR has asked the document provider for the exact location of the plan provision that states the match is payroll based. Again because the looming deadline to change my deferral I went on a search for information. The BPD does state the contributions can be (not will be) deposited more frequently than annually. Does this satisy the "if the plan so provides" in notice 2000-3? Does this mean if the employer matches each payroll that the match is payroll based by virtue of the act of depositing the match each pay period? Does this also mean that if they stop matching each payroll period it will be annual? If both of these are true does this also mean that it can change the type of match without plan amendment? Does it also follow that they could match per payroll for a portion of the plan year and only the portion that is not matched per payroll would have the match determined based on compensation earned in the partial year rather than on a payroll basis? Does anything regarding the computation period of the match need to be provided in the annual notice?

Thanks for any help in clearing up my confusion.

For those who may recognize me from my other thread, the reason I asked about the match is because I didn't want to increase my deferrals to recoup the portion of my deferrals that are not reinstated to the plan through the correction process if my increase would be subject to a true-up and thus put me in a better position than I would have been in had my deferrals not been stopped inappropriately. And yes, my head hurts. Not even 800 mg Motrin seems to help.

[Guest Sieve]

Whew!! Lots of questions . . .

Actually, the regs trump 98-52 where they overlap, and there is comparable language in the regs: Treas Reg. Section 1.401(k)-3©(5)(ii) (i.e., re: ADP SH contributions).

There must be some provision in the plan (i.e., not determined administratively) re: payroll-based or plan year-based match, or else there is a failure of the definitely determinable benefit (i.e., allocation) rule. However, I would say that it's there, even if absent -- in other words, if it's not in a specific election in the AA (which it is for some documents providers) or in the Basic Plan Document, then, in the absence of any "payroll-based" allocation language elsewhere, that means that the allocation would be plan year based (since the definition of compensation, which clearly is implicated in the determination of the SH match, no doubt will be plan year based). Logically, an annual-based allocation must be the default allocation method.

Understand, however, that whether the match is made on a payroll basis is much different from whether it is determined on a payroll basis--in the former situation, there still could be a necessity to true up at year end even if deposits are made weekly. HR's statement that the match must be payroll-based because it is made on a payroll basis is jumping to a conclusion that may not be correct--and, if a plan document says that deposits can be made/deposited more frequently than annually, that does not, in and of itself, mean that the allocation is payroll based, either, but just means what it says: deposits can be made more than once a year.

If the plan is silent--i.e., if it doesn't specify that matching contributions are payroll based, or that compensation is determined on something other than an annual basis--then SH matches will be plan year based.

A change from annual to payroll based match must be through an amendment, and that amendment may have been when the conversion occurred as part of the adoption of a new document. A change from plan year to payroll-based SH match can come only at the start of a plan year.

I'm sure you still have questions, so fire away . . .

[Guest Miller426]

Hey I'm just glad I'm not crazy to question the rationale that it is payroll based just because it is made each payroll.

Hopefully the document provider will contact HR today. The payroll is updated tomorrow and paid at the end of the month. I have until tomorrow to make a change, but since the only formal change process is through the participant website, I'd rather get it in today if I'll be making a change so that there is no question as to whether or not it was received in time or a valid election.

I was a little put off when HR started the voicemail to the document provider with "I have a silly question." It just added to my paranoia about whether I was crazy to ask the question.

Maybe there is something in the plan document that says affirmitively that it is payroll based but it isn't in any obvious place, unless the HR Director and I are both morons or it would only be obvious to those who have read or drafted thousands of plan documents. In any case I'll let you know if I hear back from HR.

Just for the mental anguish of this whole experience maybe I ought go ahead and take advantage if it turns out to be an annual match. That wouldn't sit right with me on a moral basis though, so hopefully I'll get the information I need to make an informed decision and be able to get back to my normal existence which doesn't involve hours of research daily into the nuts and bolts of plan regulations and plan operations. Though now that I have peered into the deep end and I might need a new job soon anyway, maybe I'll dive in. Think I could hang in your world, in case they decide informed plan participants are risky business and find some other basis on which to no longer need the benefits of my employ or to terminate me for cause? I don't really think this would happen since I do have support from manangement and the CFO to pursue my questions. But just in case there is a blue moon, what do you think? Sorry for the attempt at comedic relief, just needed to try to lighten my mental load.

[masteff]

I was a little put off when HR started the voicemail to the document provider with "I have a silly question."

That was code for "I know I should understand this myself already so please don't think I'm too stupid for asking you but I need to make sure what the answer is so I don't give someone a completely wrong answer." You weren't right or wrong to ask them, it's something valid for you to figure out. You just have them 2nd guessing their own understanding of how it works.

[Guest Miller426]

Good point. I was so consumed with fear and confusion I took the comment personally but what you suggest was the real meaning is much more likely.

Still nothing from HR yet. For any of those in the document provider or client contact role, what is a reasonable turn around for a question about a plan provision such as the one HR posed?

[Bird]

For any of those in the document provider or client contact role, what is a reasonable turn around for a question about a plan provision such as the one HR posed?

If HR doesn't have a personal contact at the document provider's office and they just left a voicemail, I wouldn't be confident of receiving an answer sooner than a few days, if at all.

It sounds like you have a big enough company to have an HR department, and it sounds like they are working without the assistance of a third party administrator/consultant (or "service provider" as we like to call ourselves these days), but it sounds like they are not quite big enough to make running the retirement plan a full-time job, so...they're not fully cognizant of the insanely technical nature of running a retirement plan.

Sieve's statement probably gets to the heart of the matter:

Understand, however, that whether the match is made on a payroll basis is much different from whether it is determined on a payroll basis--in the former situation, there still could be a necessity to true up at year end even if deposits are made weekly. HR's statement that the match must be payroll-based because it is made on a payroll basis is jumping to a conclusion that may not be correct--and, if a plan document says that deposits can be made/deposited more frequently than annually, that does not, in and of itself, mean that the allocation is payroll based, either, but just means what it says: deposits can be made more than once a year.

It is likely that your HR department thinks that because they are calculating and depositing matches with each payroll, they have a payroll-based match, but that's not necessarily true and in fact I doubt it. Their ongoing matches should (probably) be considered estimates, likely pretty good ones, but they should (probably) be doing an annual calculation of the match and then comparing the actual deposits against it.

The only thing I can suggest where we might help you is to ask HR the name of the document company - possibly Corbel, Datair, Accudraft, or some other vendors might be recognized, and maybe, just maybe, someone here could tell you where to look for the payroll match provision.

This is interesting (we are, truly, a dull lot) - you are the rare layperson who has the inclination to dig this far.

[Guest Sieve]

FWIW, I just today came across a similar plan design, which is not specific as to the matching allocation but is clear when the language is put into context.

The plan's allocation provision says that IF matching contributions are made more regularly than annually--and it therefore does not say how often matching contributions are made--then, in that case, the employer MAY make an additional match to produce an annual true up. In other words, matching contributions made less than annually will be payroll based, and it will take an additional DISCETIONARY matching contribution to result in an annual true-up.

It is, actually, the first design I've seen like that, and it makes some sense from a flexibility standpoint. A problem with that approach, however, is the allocation of the discretionary match: it will not be allocated on any kind of proportional basis among partcipants, and therefore it does not fit into a prototype format.

[Guest Miller426]

HR has elevated the concern to management at the service provider.

Sieve - Does this mean that it doesn't need to be specified what the match will be at any time? If so is this true for any 401(k) plan including Safe Harbor plans?

Bird - I didn't want to press my luck asking for the document providers name since I already have an abundance of e-mails regarding the plan sent to HR. I should have paid closer attention when I looked at the docs yesterday. Also I suppose I should admit I am not an average layperson as far as questions about a plan may be concerned. I never encountered issues such as these in my past life but did do a stint in the recordkeeping end of plan conversions. While the average layperson may have said "Oh bummer. I didn't know my deferrals would stop if I took a loan. I guess I'm out of luck," I had enough background to know I should question the validity of the statement that they were stopped because there are federal regulations that state they must be, since I had never seen such a restriction to exist. Though I had originally asked and been told the match was payroll based, I started looking at the documents more closely and realized the SH Notice contradicted the assertion that it was payroll based. Which ultimately led to the discussion with the director of HR and the rest you see unfolding here.

I don't know if I should disclose the name of the service provider to aid in identification of the document they might use. Maybe people can PM me with ideas. I'm not sure if this narrows the possibilities too much or too little but the provider services more than 20,000 plans.

HR expected an answer back today, but since it is after hours perhaps that will not be the case.

[Guest Miller426]

paragraph 3.02 of the Basic Plan Document, “the matching contribution amount may be determined by the employer at any time during the Plan Year so long as the amount of the matching contributions is determined in a uniform and nondiscriminatory manner”.

Ok so my memory was incorrect and it said determined not deposited so this makes the payroll period method permissible even though it is not explicity elected to follow the payroll period method. Which seems to suggest they could change it at any time without amendment so long as the change is uniform and nondicriminatory. Opinions welcome.

There is still the issue of the SH notice saying the match is 100% on deferrals up to 4% of total compensation annually. I'm leaving that as an open question with HR and updating my deferral percentage to 5%. Anyone with experience with faulty notices welcome to comment.

Whether or not a true up if ever there was one would be contributed as a discretionary match is unclear. There were three circumstances that were outlined to me that would influence the decision to make a true up contribution and they all essentially amount to if there are a significant number of participants who do not contirbute on a level basis. Does the fact that the true up is not required make it a discretionary match and therefore would be subject to vesting if there was a vesting schedule? Is it also subject to testing? Or does the fact that it is a true up make it a safe harbor match and 100% vested? Clarification welcome.

[Bird]

Wow. I may be confused but it sounds like some language regarding discretionary matches is getting mixed into the equation here when we should be talking about a safe harbor (required) match, and whether it is determined on a payroll or annual basis. I don't think that language about "the matching contribution amount may be determined by the employer at any time during the Plan Year so long as the amount of the matching contributions is determined in a uniform and nondiscriminatory manner” is relevant here at all.

I still think that eventually someone is going to find language specifying that the match is either annual or payroll-based (my money is on annual), period. But if your safe harbor match can really have an optional true-up, I don't think the true-up would be considered a discretionary contribution subject to vesting. I'm quite sure it is meant to still be safe harbor. (I really dislike the idea of an optional true-up on a required match!)

- Sieve, was that provision about an optional true-up specific to a safe harbor match?

I'm curious to see how quickly this will be addressed by a service provider handling 20,000+ plans.

[Guest Sieve]

Bird --

I do not think the match language I saw was SH related--someone brought the plan in for a different question, and I just happened to come across that language during my 2-minute review. I think it wasn't a SH plan because I agree with you that a SH match could not leave to the employer's discretion the basis on which to determine the allocation of the SH match (i.e., based on payroll or annual compensation). But, I'll try to get my hands on the document again to confirm--and, hopefully, not to be surprised. It appeared not to be a VS.

To the extent you're suggesting that an annual-based SH match is preferable--since you're betting that that's what the OP plan is--I do know that administrators who also sell product obviously enocurage a payroll-based match to encourage regular employer contributions. Without it, the dollars won't usually roll in until sometime the next year. Besides, a payroll-based match saves money--and, with a mandatory match, that's important to many employers. It just forces the HCEs generally to defer pro rata throughout the year to receive the full 3% match.

426 -- As I mention above, I think the provision I described seeing would not work in a SH plan. For a non-SH plan, I think that provision means that if contributions are, in fact, made on a payroll basis, then you have a payroll-based match--if not contributed on a payroll basis, it is an annual basis allocation.

[K2retire]

The Corbel prototype has a question that specifically requires the drafter to complete whether the safe harbor match will be made per payroll period, calendar month, Plan Year quarter or Plan Year. I would imagine that is a common provision with other documents as well.

[Guest Sieve]

K2 -- I think you mean that the Corbel prototype asks for the basis on which the match will be "determined" (i.e., calculated), rather than when they will be made. The timing of the contribution is not specified in the Corbel document, to the best of my knowledge--and regulations require that SH matching contributions calculated on a periodic basis must be contributed at least quarterly.

[K2retire]

K2 -- I think you mean that the Corbel prototype asks for the basis on which the match will be "determined" (i.e., calculated), rather than when they will be made.

Of course that is correct. It's Friday afternoon, and apparently my brain has already started the weekend!

[Guest Miller426]

In an effort to assure people that my intentions with respect to the questions I have been raising to HR concerning the plan are to protect the plan I have notified my employer of this thread since some of the information provided here seems to contradict the information provided by the TPA.

I have requested copies of the pre and post conversion plan documents. Hopefully I will find what I need to alleviate my concerns or I will be able to provide the document references to demonstrate my concerns.

I will continue to search for information and hope that this will all be resolved soon.

[Guest Miller426]

So that I could try to sleep tonight, I detailed my concerns with the plan. I will not post them to this thread for the benefit of those who aren't interested in the details. For those who are interested you may check out my new thread which will be posted shortly.

[Guest Miller426]

I have had some time to review the plan documents. After review I had additional questions concerning the safe harbor match and I posed them to HR but do not wish to publicly disclose them. I did however find that the TPA did provide the wrong plan reference in answering my original question, though the correct plan reference is not all that much different. Although I have already posed my own questions to HR regarding the following provisions, I am interested in how posters here would interpret these provisions and how they would operate the plan in accordance with these provisions.

Plan Section 3.03, paragraph 1 "...To the extent that any other provision of the Plan is inconsistent with the provisions of this Plan Section 3.03, the provisions of this Section shall apply."

Plan Section 3.03 A. "...The proper ADP Test Safe Harbor Contribution amount may be determined by the Employer at any time during a Plan Year, including but not limited to, such time as ADP Test Safe Harbor Contributions are delivered to the Trustee (or Custodian, if applicable)) or at the end of the Plan Year so long as the amount of ADP Test Safe Harbor Contributions is determined in a uniform and nondiscriminatory manner."

[Bird]

I don't know what that is supposed to mean, sorry. If it is saying that either payroll or annual calcs are ok, I think it could be said better. But on the other hand I don't know what other purpose that sentence could serve.