Compensation Limit for Match Calculation

[Guest rgorman]

401(k) plan has a match formula that matches 100% up to the first 3% of compensation deferred. They calculate the match per pay. They have not been limiting the compensation to the annual limit under 401(a)(17). So for the 2004 plan year, an HCE that made $300,000 ended up with match of $9,000 instead of 3% of 205,000 equaling $6,150. My understanding is that they can match on each pay but need to limit the overall match to the 3% of the compensation limit for the plan year. Has anyone had experience with this.

Also, had an issue with recordkeeping system where HCE that was eligible to defer did not start deferring until 7/1. When we tried to do the match calculation on the system, it would not give him match since his salary from 1/1 - 7/1 exceeded 205,000. So they said he had already exceeded the compensation limit and was not eligible for match over the 205,000 - even though he had not deferred on that match. Pursuing this with the recordkeeping system people.

[QDROphile]

You are correct that the match must be limited by use of the legal maximum rather than the higher actual compensation.

Kick ass on the record keeper.

[Guest rgorman]

Thanks. Can you also confirm that this is an overall plan year limit and does not have to be per pay (ie 3%*205,000 divided by 26 pays = 237 max match per pay). This is the latest from the recordkeeping system people.

I am assuming if you have a cumulative field that adds up the per pay match and shuts it off after it reaches 3% * 205,000, then you are fine.

[QDROphile]

As a legal matter, this is a limit applied for the year. This pont has been discussed in several other threads. I think it is a sign of incompetence, but a plan can be designed to apply the limit in some way over periods within the year, with the result that the annual maximum permitted match is not received. Then you have a disclosure issue.

A stop like you describe should work to keep the match amount within the legal limit, but won't necessarily assure you the correct match, depending on how the periodic match works. The match could still be be too low. Unfortunately, a lot of systems apply a similar stop when the pay-to-date amount reaches the limit, regardless of the accumulated match amount.