Discretionary Match

[Guest Sehrl]

For a plan that has a dicretionary match formula, must the BOD complete a Board Resolution each year a match contribution is made? Must the particicpants be notified of the match formula each year? Has anyone ever had an issue come up with the IRS or DOL where they were asked for a Board Resolution pertaining to a discretionary match formula for a give Plan Year?

Any help is appreciateted.

[Guest Kconsultant]

I'm interested in this too...

Thanks.

[four01kman]

I haven't seen this issue for a long time. My recollection is that in order for a discretionary employer contribution to be deductible, either the amount or the manner in which the amount is calculated must be communicated to the plan participants prior to year end, even though the contribution itself does not have to be contributed to the plan until the employer's tax filing date, including extensions. I don't know of anything that the Service has issued in the past 10 or 15 years that changes their original position. If anyone knows differently, please let me know.

[2muchstress]

Not that this will answer your question, but the last few IRS and DOL audits I've gone through, nobody has asked to see a Board Resolution. All of these audits ended up as being "accepted as filed with no changes".

I don't know how much weight the IRS or DOL actually put on Board Resolutions.

[david rigby]

As previously noted on these message boards,

if you can hold your Board of Directors meeting in your bathtub, you don't have a problem.

[RTK]

My recollection is that you do not need a resolution before year end, nor do you need to communicate the amount to the participants. If my memory is correct all is needed for tax deduction is communication to the plan administrator of the year or proper administrative treatment of the contributions. Try Rev. Rul. 76-28.

[Guest Tinman42]

I think it depends on the auditor - during an audit last year a client of mine was asked for their BOD resolution for the discretionary match for the year in question. Luckily (and amazingly!) the client was able to produce a BOD resolution they had posted for their employees at the beginning of the year being audited.

We actually request a copy of the employers BOD resolution each year in our census package. We probably get about 50-60% response.

[KJohnson]

I am not sure where the "minutes by the end of the year requirement " comes from unless the employer decides to alter its matching allocation formula. I have tried to find the basis for this "rule" and have not come up with anything.

It is true that a plan’s formula for allocation any profit sharing plan amounts must be definitely determinable under 1.401-1(a)(2)(ii). This includes the allocation of match amounts. I think that the IRS has been inconsistent in “catching” this issue with regard to allocation of discretionary matching contributions. Typically, when it does, it forces a plan to put in an allocation formula that states that, while the match is discretionary, it will be based on a discretionary percentage of the amount of deferrals made by participants (i.e. language like “a matching percentage that the employer deems advisable of the participant’s 401(k) deferrals”). Thus, the amount of match is discretionary but the allocation formula is not.

Once you have this language in, I could see an issue if you did not have minutes in by the end of the year and you wanted to modify the allocation formula. Let’s say at the end of the year, the employer decides that it doesn’t want to match any deferrals above 4% of compensation so that its matching formula would be -- 50% of all deferrals made, provided that no deferrals over 4% of compensation will be matched. The problem here is that while the 50% match is fine under the Plan’s "definitely determinable" formula, the 4% “cap” is not in the plan document. Thus, the employer would need minutes changing the match for that year before an employee accrues a benefit under the formula (assuming a last day of employment requirement for the match). In other words corporate action would have to be taken before the participant “accrues” the right to the match with no stated cap.

However, if under the example above, the employer decided that it would match 50% of all deferrals with no cap, I don’t see any reason why the minutes would have to be in place by the end of the plan year. Wouldn't this just be the same as a discretionary profit sharing contribution? As long as you follow your allocation formula, you have until the time for filing the corporate tax return to decide on the amount of the match.

This has come up on several occassions, and outside what is discussed above I haven't been able to locate the rationale for the "minutes by the end of the year" requirement. I haven't gone looking at PLRs or TAMs, but does anyone else know of anything out there that is definitive on this issue?

[John A]

Could an employer with a discretionary match declare that a certain match will continue until a new BOD resolution changes it? For example, could a plan sponsor declare that the discretionary match will be 50% up to 4% based on each payroll period starting January 1, 2004, and then continue to make this discretionary match without doing any new resolution until July 1, 2007, when a new resolution is done declaring that the match will be 25% up to 5% from July 1, 2007 forward? Or must the sponsor declare what the discretionary match will be each year?

[g8r]

I think you could have a resolution that stays in effect until modified.

Also, I think the issue regarding a resolution is more of a state law issue than an IRS issue (which would explain why it rarely comes up in an IRS audit). The question is whether the board of directors must approve a contribution or whether management can make the decision without board approval. Likewise, as pointed out, if you are changing a plan provision, board approval is needed because management won't have the authority to amend the plan on behalf of the company. It doesn't matter that the decision to make a contribution is after the end of the year (in my opinion). It just matters as to who can make a binding decision to make a contribution.