Discretionary Match

[Guest PSH]

A 401(k) plan provides for a discretionary matching contribution to be made as deferrals are made. The plan sponsor determines the rate of match before the plan year begins for that plan year. In the middle of the plan year the employer wants to either change the rate or stop the match for the rest of the plan year. Can an employer change the rate of a discretionary match during the plan year without amending the plan by simply giving a notice to employees? To stop a discretionary match during the plan year, must he amend the plan to remove the matching contribution? Or, can he stop the match after notifying employees?

[Mike Preston]

What is it about the term "discretionary" match makes you think that it is not discretionary? There must be something I'm missing.

[QDROphile]

If the employer announces to participants before the beginning of the year that a specified match will apply for the year, how is that different from a profit sharing plan that specifies a rate of contribution for the year or a money purchase plan?

Don't cheat by assuming that the plan provisions and the announcement have express qualifications that allow changes in the contribution rate during the year.

[GBurns]

After the annual announcement and therefore the commitment to that now specified contribution, doesn't that remove the "discretion" as far as that specified period is concerned?

[Mike Preston]

I don't think it is cheating to rely on the definition of discretionary as meaning discretionary. However, I agree with you that a match may not be discretionary if there is a commitment to the employees. In the case where the documnet itself labels the match as discretionary, though, the worst case scenario is that the commitment can be eliminated prospectively. If I was concerned about the underlying elections being predicated on the discretionary match I would ensure that the participants had an opportunity to modify their investment elections at the same time that the level of match was being modified (that would likely be the vast majority of cases).

[QDROphile]

But what about the person who did not defer early in the year in reliance on the ability to defer later in the year (oh, sure!) and still get the full match that was promised by the announcement? A change in deferral now may not be enough to hit the intended target by the time the match changes.

[R. Butler]

I agree with Mike Preston discretionary generally means flexible, unrestricted, not mandatory. The fact that it might seem unfair to particular participant may make it bad for employee relations, but it doesn't make it wrong. We would agree that the employer could terminate the match. Isn't that just as unfair?

As Mike Preston points out you need to review the document carefully. I have seen at least one document that allowed for a disretionary match, but provided that the match had to be declared at the beginning of the year. Employer could stop matching, but it could only be altered prior to the start of a year. (Probably to alleviate the concerns QDROphile sets forth.) It was disretionary, but the discretion was specifically limited by the document.

[QDROphile]

This discussion is only one example of how ill-advised it is to have a discretionary match. Anyone who thinks through the reasons for a match and who the employer wants to reward should come to the conclusion that a discretionary match is a very poor way to accomplish any legitimate goal, except perhaps opportunistically putting a few more tax deferred dollars in the owner's account. Paranoia about insufficient funds to cover the match is a shallow excuse for inadequate analysis.

[KJohnson]

You might want to look here (BTW I don't agree with the "advice" that was given to the prototype sponsor by the IRS referenced in the post):

http://www.benefitslink.com/boards/index.p...=ST&f=20&t=4889

Also, I echo that you need to look at your document. Even if the employer is making the match on a payroll by payroll basis there is a chance that the match is based on a yearly amount of deferrals in which case you might have "true up" issues if you changed the amount of match mid-year Look here for a general discussion of true-ups:

http://www.benefitslink.com/boards/index.p...ST&f=20&t=19545

[Guest PSH]

Thanks so much KJohnson for the link! Your Mar 17 2000 message is exactly how I understand it - and the response we have received from a reviewer in Cincinnati as well. It's just that I have been challenged big time lately. I'm glad to see this response! Actually, the plan document does require "one rate for the plan year." However, it's a tailor made document. For the client that wants to stop the match, I'm going to suggest the client amend the plan to stop it. A "discretionary" match does not mean the employer can change the match or stop it at various times during the plan year. Thanks again!