Match True Up and the affect of Payroll Adjustments

[Guest susanward]

As a 401(k) plan record keeper we have been asked to design and implement "true-up contribution" functionality to a 401(k) plan. The true-up contributions are intended to ensure that all participants in the 401(k) plan get the most of their company match by determining if the average percentage that an associate contributed to the plan would have resulted in earning a larger company match. If that is the case, the employer will make up the difference in the form of a "true-up contribution."

I would like to know what other recordkeepers are doing in terms of applying negative and positive adjustments (i.e. hours and deferral adjustments) sent in by the employer to make a participant either match eligible or match ineligible for true-up contributions. For example, the plan makes participants eligible for company match with the completion of 1,000 hours in a consecutive 12 month period (determined at anniversary date or at the end of the year). If a participant was determined to be match eligible on their anniversary date with 1000 hours of service, and a negative adjustment comes in after the anniversary date with a pay period end date prior to the one year anniversary, and the end result of that adjustment is that the participant really did not have 1000 hours on their anniversary date, the employer wants to make that participant made ineligible for match and remove the money contributed in error. It would also work in the opposite direction for someone who was not match eligible on their anniversary date if they did not have 1000 hours, but a positive adjustment with a pay period end date prior to their anniversary date will make them match eligible. In this scenario the employer would submit make up match contributions.

We are looking for industry trends with regard to applying negative/positive adjustments and determining match eligibility. Do most plan sponsors go by the "once eligible always eligible rule"? Do plan sponsors implement a timeframe for dealing with payroll adjustments (i.e. 6 - 12 months) and after that timeframe they will not rerun true up / match calculations?

I would greatly appreciate any information anyone can provide.

[austin3515]

I am utterly confused!

Most docs I have seen provide that in the first year, if the employee works 1,000 hours in the first 12 months of employment he is elibible. They also typically provide though that if these requirements are not met, then the eligibility computation period defaults to the Plan year. This is what I believe the doc your talking about says.

Regardless, once an employee becomes eligible, they are eligible forever (or until a break in service/termination). I am confused as to why people flipping from ineligible to eligible and vice versa is a common thing at this company?

If the doc in question provides that in each year the participants must work 1,000 hours in order to receive an allocation of the match (not the same thing as becoming ineligible), then the match should only be made after the end of the year, and therefore no true up would be necessary. If such a requirement exists I should think funding after the end of the year would be mandatory as this would be the only way to ensure compliance with the plan doc.

Finally, I would question any operation that mandated removing money from a participants account! Especially if the need for such an adjustment was part of normal operations.

Maybe I'm way off base but this sounds like a disaster if the IRS/DOL ever came in!

[Tom Poje]

it sounds like you have the following:

company matches during the year, on a per payroll basis, for example 50 cents on the dollar, up to 5%.

Employee A did not defer the first half of the year, but then deferred 10% in the second half of the year.

Obviously, this would require a true up at the end of the year, so that the average over the whole year averages out correctly.

Employee B deferes during the year, and receives the match. However, he either fails to work the required hours, or terminates thereby making him 'ineligble' for the match, if that is what the document says.

This is a recipie for disaster. Not only must $ be removed fron his account but gains/losses must be calculated. And if its individual investments the headaches grows. We ''gently, kindly, and lovingly" tell clients to 'not do this'. Austin is correct, you may have problems if this was not clearly communicated on participant statements etc.

If you are going to match every payroll period, I would have all match $ put in a pooled account, and at the end of the year alloacte it to all participants. After all, technically, at least if there is a last day employment requirement, no one has earned it