Matching Contributions--When is a True-Up Required?

[Guest CRC02]

A plan provides that matching contributions are discretionary and are made to a maximum % of pay. The plan makes matching contributions on a pay period basis and has always done so. However, neither the plan nor the SPD states that the match will be made on a pay period basis. Given how the plan is operated, a participant whose elective deferrals cease before the end of the year because of the 402(g) limit does not receive the full match they are eligible to receive under the plan--there is no true-up. Is there a problem with operating the plan in this manner when the plan document states that matches will be based on pay? Could the way the plan is written require a true-up, or is a true-up only required when the plan document includes one?

[Archimage]

Since your plan does not state how often the match is calculated, you should operate the plan on a consistent basis from year to year based on your interpretation of the plan. If you have not been doing true-ups in the past, I would recommend not starting now unless you amend the document to have the match calculated on an annual basis.

[pjkoehler]

If the plan and SPD language is actually ambiguous on this issue, the plan fiduciary(ies) with the authority to interpret the plan document (most likely the Plan Administrator or administrative committee) should be asked to clarify this plan term by adopting the current pattern or practice as the meaning of this term pursuant to whatever rules of internal governance under which it operates (resolutions, committee meeting minutes, etc.) This should also be distributed to the participants under the SMM timing rules. This administrative interpretation should be incorporated in the next plan amendment and SPD restatement (as a clarification of the original plan language).

[MWeddell]

It's all a matter of interpreting the plan document, which means it's a hard question to answer by message board postings. I don't disagree with the other posters, but often if the plan is silent on the issue, the document may be worded in a way that implies that the match is calculated annually, which may require a true-up.

[pjkoehler]

MWeddell: I'm not sure how to interpret your statement:

"if the plan is silent on the issue, the document may be worded in a way that implies that the match is calculated annually."

But, anyway . . . all plan documents contain terms that are arguably ambiguous (otherwise plan documents would be very lengthy). Although this is isn't intentional, the ambiguity arises typically because the document is not an administration manual. For that you need the plan administrator, who based on the responsible fiduciary's interpretation of such terms, sets forth administrative procedures and rules that resolve the ambiguity. A well-drafted plan will contain a provision that allows the plan administrator to construe the meaning of plan terms. The Supreme Court provides a milestone analysis of the importance of such a provision in Firestone Tire & Rubber v. Bruch, 489 US 101 (1989). There the challenged plan term was the definition of the term "participant." The Court held that so long as the plan document assigns the duty of interpreting the meaning of plan terms to the plan administrator, a court should defer to the administrator's interpretation unless that party making the challenge can show the administrator's interpretation was an abuse of his discretion (i.e. was totally unreasonable) or unless the plan administrator was subject to a conflict of interest in making the interpretation.

When an ambiguous plan term is discovered, the potential for a dispute can be minimized if the administrator makes an official determination in writing, which is then disclosed to the participants. In the absence of this, should a dispute arise, a court may have no record of the administrator's interpretation of the challenged term and would be constrained to makes its own determination on the merits (which is always a risky proposition).

[R. Butler]

I can see MWeddell's point. The document is going to define compensation. The document also probably defines the period for measuring comp. i.e. Plan Year, portion of Plan Year in which the the employee is a Participant, etc. Many documents do not provide for different definitions of compensation based on source. Those documents are silent as to "true-up" contributions. Because they are silent as to "true-ups" does that mean you can read that provision into the document? I don't necessarily think so; you are stuck with the definition the Plan provides.

I agree with MWeddell you really have to see the document to determine if there is any wiggle room. If this a prototype plan and you amend it to include provisions not available in the prototype, have you just taken it out of prototype status?

[pjkoehler]

One of ERISA's fundamental fiduciary duties is to act in accordance with the governing instruments of the plan. How is a fiduciary to do that in this case? To "true-up" or not to "true-up?"

The responsible fiduciary cannot be "stuck" within the quandry of ambiguous plan terms and still satisfy this standard. There's no punting when you're the fiduciary. ERISA provides for this magical, ambiguity-resolving mechanism called discretionary authority. The fiduciary has to use the discretion that makes it a fiduciary to construe the plan to eliminate the ambiguity. Firestone allows the fidiuciary to "read" such a provision into the plan as long as such a construction is reasonable. I'm not suggesting this problem doesn't reflect poor plan draftsmanship and the employer should definitely communicate the decision to the participants and incorporate it into the next plan amendment and SPD restatement. I'm also not suggesting that it would be equally reasonable either way. That should not deter the fiduciary. Under Firestone, it doesn't matter how many alternative reasonable interpretations could have been made, it just matters that the fiduciary's interpretation was itself reasonable. To satisfy the reasonableness standard, the fiduciary may have to research the plan history, consider the plan's pattern or practice of not providing true-ups, any exposure to disqualification that any interpreation might create, etc. .

While others may disagree with the fiduciary's interpreation, the plan provides that the fiduciary's reasonable construction has more far reaching implications, i.e. it has the force plan language.

[MWeddell]

Thanks, R. Butler, for making my point, which is not intended to disagree with Firestone if the plan truly is ambiguous.

If one looks at the plan provision regarding matching contribution allocation, it might not expressly state whether the allocation is made on the basis of a year or a month or a pay period, etc. However, by tracking through the plan's definitions of what are Basic Deferrals or what is Compensation, sometimes the annual concept sneaks in anyway.

The larger point I was trying to make is that this is a matter of interpreting the plan document, not what the Code or ERISA or regulations demand, so it's hard for us to answer the question.

[Erik Read]

Did we all miss that the first sentence says that "Matching contributions are discretionary and will be made to a maximum % of pay".....

That being said - I would say the document is not only silent, but leaves the room for the annual Trustee's matching resolution to stipulate both the matching %, the % of compensation included in the matching calculation, and the time period used - annually or per pay period.

I think we just need to say, have the board stipulate in their resolution which then should be distributed to the employees in an annual notice that shows the factors at hand.

[pjkoehler]

ERead: In the initial message in this thread, we're told that the employer makes the matching contribution per payroll cycle. "However, neither the plan nor the SPD states that the match will be made on a pay period basis." Therefore, the initial question is whether or not the employer is determining the matching contribution in accordance with the plan terms, notwithstanding any express plan terms that support its practice as the binding interpretation of the plan by the responsible fiduciary. There are two possible scenarios:

(1) If this is the fiduciary's interpretation, then why worry about true-ups? Such an issue arises only if the plan administrator takes the view that the employer matching contribution is not correctly computed by determining the match payroll cycle by payroll cycle. This is a classic Firestone fiduciary dilemma that can be resolved by the plan administrator's interpretation that this is how the plan determines the matching contribution. That's enough under Firestone. Disgruntled participants who think otherwise can have at the fiduciary on a theory of breach, but there cause of action will go no where unless they can show that such a construction was unreasonable on its face.

(2) The employer only matches on a payroll cycle basis for administrative convenience but would like to true-up. Ok, no problem, assuming the plan administrator (who is also probably the employer or some delegate) interprets the plan to require that matching contributions be determined on an annual abasis. Let the employer make the true-up when necessary.

Either way, it's initially an interpretation by the responsible fiduciary, communicated to participants and reflected in subsequent plan amendments and SPD restatements.

Trying to devine the one true meaning of undefined or poorly defined plan terms, is like searching for the settlor's intent. If plan language is subject to multiple reasonable interpretations then it is indisputable "truly ambiguous" in that regard. No need to get into a literaray exegesis of plan text. Courts will not second-guess fiduciary's that can show their interpretation was based on a reasoned judgement. That's where the buck is supposed to stop.

The lesson of Firestone, is that plan fiduciary's who don't make official interpretations may be second-guessed by the courts.