Can a safe-harbor plan that matches on a payroll basis match on deferrals on compensation in excess of the comp. limit?

[JDuns]

I am using 2003 limits for my example because the numbers are easier for my little brain to work with.

Assume that the plan matches, on a payroll basis, 100% of the first 3% of compensation deferred and 50% of the next 2% of compensation deferred. (and the plan uses identical language to describe the deferral and the match as a percentage of compensation)

Assume an employee earning $300,000 wants defers 4% of pay each pay period ($12,000 total). It is clear that a plan may permit that deferral and not limit the deferral to $8,000 (4% of the first $200,000 of compensation).

A reputable TPA agrees that this is allowed. However, they insist that a payroll based match may only consider the first $200,000 of compensation when calculating the match. Therefore, they insist that the employee referenced above would not be eligible for an $8,000 match (the lesser of 4% of 200,000 and 3.5% of 300,000) but a $7,019 match.

(For those interested, the 7,019 is calculated by calculating each pay period's match as the elected deferral percentage multiplied by limited pay and divided by the total pay for that pay period. For the first 17 pay periods, the employee would receive a 3.5% match on 11,538 of compensation and for the 18th pay period a 1.33% match on 3,846 of comp.)

They argue that this is required to avoid discriminating in favor of HCEs.

Anybody else dealt with this question.

[QDROphile]

I think you are concerned about an issue that is a false issue relating to the timing of compensation rather than the amount of compensation. However, you may be asking a more sophisticated question and not giving enough facts about plan design with respect to limits on deferrals.

Read other messages on this subject on these Message Boards and if they don't address your concerns, ask your question again with the relevant plan information. You will know what is relevant once you understand the basics of the false issue from the other messages.

[Harwood]

QDROPHILE: can you direct us to a prior thread that discusses 401(a)(17) in the context of a plan that defines compensation on a per-payroll basis [and therefore introduces the factor of timing]?

[QDROphile]

Not at the level of sophistication that is latent in the question. That is why I invited some consideration of what the question is really about. If someone has a simplistic concern that a participant can receive more pay than the 401(a) (17) limit and yet contributions don't stop at that point in the year, I don't want to talk about it and other threads cover the general point. If the question really is about the fine points of the period-by-period calculation, then more information would be very helpful to focus the discussion. That information includes what limit, if any is placed on the deferrral for the period and how it is calculated.

By the way, I think there is an interesting question here and I don't think there is any authority to resolve the possible answers.

[JDuns]

Here is the example using 2003 limits:

Comp per pay period (26 biweekly) - 11,582.46 - $300,000 total for 2003

Deferred compensation - 4% per pay period - $461.54 per pay period - $12,000 total for 2003

Plan defines the safe harbor match as follows: "for each payroll period ... equal to 100% of first 3% of compensation deferred as 401k deferral plus 50% of compensation deferred as 401k deferral that exceeds 3% but does not exceed 5%"

My position is that the match should continue at 3.5% on a 4% deferral unless the plan's limit would be exceeded (4% of the comp limit, or 8,000 for 2003)

The TPA and I agree on the match for the first 17 pays (YTD comp = 196,153.85) of 403.85 (3.5% * 11,582.46).

However, the TPA insists that the match on the deferrals for the 18th pay should be limited to 153.85 (matching only on the 3,846 of compensation to the comp limit). They acknowledge that the plan language does not restrict the match to the "first comp" but assert that this is how their system calculates matching contributions for all clients who match on a payroll cycle basis.

The further assert that DUE TO DISCRIMINATORY BRF ISSUES, matching on the deferrals made on compensation in excess of the compensation limit requires a year-end true-up (plan year basis calculation) and may not be made for payroll cycle plans.

I'll admit that I can't see their argument and that's why I have asked for help.

[QDROphile]

The 401(a)(17) limit effectively says that you cannot take into account amounts in excess of the limit to allocate contributions. The regulations also require proration for periods of less than one year.

Workin from those principles (not necesarily perfect application), I start from the proposition that you would prorate $200,000 to fit your compensation periods. Any amount in excess of the prorated amount for the period would be disregarded. That would apply first to the deferral election for the period and then to the match. Example: 26 periods with a limit of $7692 per period. If I elect deferral at a 4% rate, my deferral for the period is $308 and the match is then figured on that deferral amount and compensation of $7692. But $308 times 26 only gets me to $8008 rather than $12,000 so I need to elect more than 4% to get me to the maximum deferral for the year.

Your pattern violates my proposition, so I would have to think much harder than I I am able right now if I were to try to give you an answer other than the system used by the TPA was faulty from the beginning. I am not saying that the system was faulty. I simply am not trying to apply what actually happened when what happened did not fit a design that I can understand and support. Perhaps other designs could work.

I also think that pay period by pay period matches without an annual true up are rife with problems that people don't anticipate and I never recommend them. You have illustrated yet anouther way that the arrangement might result in an unsuspecting participant inadvertently failing to get the maximum match allowed by law despite making the maximum deferral.