Changing the matching formula

[Guest Kelly Igel]

I know that safe harbor plans using the matching option may discontinue the safe harbor match mid-year, but must provide a 30 day notice to employees before the match ceases.

But there do not seem to be a lot of guidelines on when (and what must occur) in other cases (non safe harbor plans) where a fixed formula match is being amended -- either to no match, a discretionary match, or another fixed formula match.

Are there any special employee notice requirements in these cases? I know 204(h) (now 4980F) does not apply to profit sharing plans...but it seems some type of notice would be necessary. Just a regular Summary of Material Modifications?

I know there are anti-cutback issues to worry about. Therefore I am looking for comments or confirmation on the following approaches:

If the match is determined based on the entire plan year, it generally cannot be changed mid-plan year (unless there is an "employed on the last day of the year" accrual requirement and the amendment is done prior to that date). (Correct?)

If the match is determined based on each pay period, it can be changed effective for a future pay period. (Correct?)

Thanks.

[Archimage]

I believe the only thing required would be an SMM. You can change the match to whatever you want as long as no participants have not accrued the benefit yet. For example, if a participant has worked 1000 hours and the doc says you have to work 1000 hours to receive the match contribution, you cannot take that away from the participant. If you are doing the change for the beginning of the plan year, you should be fine.

[EGB]

Is Kelly correct?

My facts: Merger of two corporations, A and B. A maintains a 401(k) plan with small match. B maintains a 401(k) plan with a larger non-discretionary match, with no requirements to be entitled to the match other than deferrals (e.g., no last day, 1000 hour req.). The 401(k) plans merge mid-year and they want to continue the match from A's plan (ie, the lower match) for everyone for the rest of the plan year. Plan A allocates match on payroll period compensation, but Plan B allocates match based on annual compensation. Must the Plan B match be maintained for the remainder of the year for the Plan B participants?

More basic question is: In a plan that has a non-discretionary match, with no requirement to be entitled to an allocation other than deferrals, is it ever appropriate to reduce the match mid-year? Does the answer to this question depend on whether match is determined based on payroll period compensation or annual compensation?

Any comments are greatly appreciated. Thanks.

[RTK]

I believe that the match could be reduced mid-year for both the payroll period compensation and annual compensation plans, so long as it is being reduced for future deferrals. However, I do not believe that a plan can reduce the match due for the deferrals already made where there are no eligiblity or allocation requirements other than deferrals (absent some really unique plan language).

Even if a profit sharing plan, if possible, notice of the reduction should be provided before its effective date. To do otherwise, leaves the plan/employer open to potential contract or fiduciary claims. In this regard, the plan should be reviewed to confirm that it is in fact a profit sharing plan. I have encountered some money purchase plans with matching contributions subject to 204(h).

Finally, the plan's amendment language should be reviewed to make sure there is no contractual limitation on the sponsor's right to amend. I have seen some strange "boilerplate" over the years.