Calculating Employer Match

[DP]

We just acquired a takeover plan where I'm questioning how the match had been calculated. This is a 401k plan with a 100% match up to 5% of compensation. The definition of comp used in the plan is W-2 wages.

One employee gets two checks each pay period. One is for her regular salary of $999.35 and the other check is $99.29 for office cleaning. Both checks are subject to taxes and will appear as W-2 wages. This employee has elected for a 7% deferral ($69.95) to come out of her regular check only.

When I calculate her deferral percentage I get a total deferral of 6.37% ($69.95 / total comp of $1,098.64). I figured the Match as $54.93 or 5% of $1,098.64.

The previous TPA calculated the match as $49.97 or 5% of $999.35.

Which is correct?

Thanks.

[WDIK]

I agree with you, but every time I think I'm certain about something, someone else on these boards will point out the flaw in my logic.

[RTK]

Don't forget to review the plan language.

I have seen a variety of provisions. For example consider plan language that provides that the match is 100% of the elective deferrals made with respect to the 1st 5% of compensation. In that case, the match would be 49.97 (i.e., 100% of the first 5% of comp contributed).

[RCK]

If the plan defines recognized compensation as W-2 earnings, I find it very difficult to believe that it allows two different deferral percentages--one for ordinary earnings, and one for office cleaning earnings. So let's assume that it does not.

First of all, you fix that going forward. Tell the employee that the same deferral % must apply to both checks, and that the match will be based on the first 5% from each check.

Then you go back and look at the historical match calculations. Given that they are based on a set of facts that the plan does not allow, you have some leeway to do what you think is right. I think that the prior adminstrator's approach is right.

RCK

[WDIK]

RTK: Please elaborate on your statement about the "first 5% of compensation." I'm not sure that I follow how this results in the $49.97 match amount. The participant receives two checks each pay period. If compensation is defined as W-2 wages, how do you distinguish between the two checks to determine which applies toward the first 5% of compensation? I appreciate your help in understanding this better.

RCK: I think that you are right to suggest this situation be corrected prospectively. Could you please explain your reasoning as to why the prior administrator's approach was right? Thanks in advance.

[GBurns]

DP,

Although both these payments appear on the employee's W2 are they both recorded on your books and other reports as Wages? Or is the $999.35 Wages whereas the $99.29 is "Other Compensation"?

[DP]

GBurns, On our records, the cleaning check is posted to "Maintenance Salaries" while the other is posted to "Regular Salaries".

[RTK]

WDIK: I should have been clearer in my post.

In the plan language I had in mind, the compensation in the match formula is the same compensation used to determine the amount of elective deferrals. I just didn't tell anybody. Thus, the match in that case was 100% of the elective deferrals made with respect to the first 5% of compensation used to determine the elective deferrals.

For elective deferrals, that plan uses regular payroll comp, but excludes bonus comp otherwise included in W-2. Thus, if participant elects 7% elective deferral, and has $20,000 regular comp and $5,000 bonus comp, the participant's elective deferrals would equal $1,400 ($20,000 x 7%).

The match would equal 100% of the elective deferrals contributed with respect to the first 5% of the regular compensation (used to determine the elective deferrals). (Essentially, match is one dollar for each dollar of elective deferrals contributed from the first 5 of the regular compensation). Thus, the elective deferrals contributed from the first 5% of pay would equal $1,000 ($20,000 x .05), and the plan would match 100% of those elective deferrals, or $1,000.

The point I was making is that a review of plan lanquage is always warranted in a takeover, since I have seen a variety of match language the meaning of which was not always evident at first glance.

[RCK]

WDIK: My reply was based on the following theory: Any way you look at, it's wrong, so it's a matter of picking the least irrational solution. To me, that is saying that checks are not simultaneous, they are sequential. And the participant elected a 7% deferral on the first check, and a 0% deferral on the second check (because that IS what happened). Then the match has to be 100% of the first 5% of contribution from the first check--what the prior administrator did.

I realize that to make this work, you have to be able to claim that the participant has made sequential elections--7% and 0%, and that is certainly a stretch. But the reality is that no money was taken from the second check--how can you claim that a protion of that amount was deferred?

RCK

[WDIK]

Thank you both for your responses.