Discretionary Match Issue

[Guest CathyS]

I have a client that uses a discretionary match. Client started matching per the specified formula January 2006. They stopped matching end of February 2006 for financial reasons. They did not notify us so there is no amendment in place relating to any of this. What are the requirements for amending a discretionary match as far as timing of a board resolution? Does this client have to match for the year?

[Jim Chad]

If it is truly a discretionary match the document igves them the option to decide on the amount right up until the tax return is filed. It sounds like they have a smaller match for 2006 than they would like to have.

If the document says that the match is on a payroll or monthly basis, you might be all right as is. If the document says that match is calculated on annual compensation and annual deferrals, than you need to do what is often called a true-up calculation. This is where you compare the match calculated on an anual basis to what has been paid and make what ever additional match contributions are required.

[Guest CathyS]

The document defines that match as discretionary. It also states that, "The matching contribution formla elected in #16 above (and any limitations on the amount of a Participant's Section 401(k) Deferrals considered under such formula) are applied separately for each Plan Year. The client only matched deferrals for the first two months as I mentioned and then stopped. Are they now required to match the rest of the deferrals for the Plan Year? Could they have amended the plan March 1st to change this so that they didn't have to match for the entire year?

[Kimberly S]

If the document says the match is discretionary, they do not need to amend it. If they have a separate corporate resolution saying that they will match X% for 2006 that resolution may need to be amended to a new lower percentage, but that would be unusual.

The true up mentioned above would need to be done to make certain that each participant received the same percentage, but that doesn't mean they have to increase everyone to the percentage that was anticipated by those first couple of deposits. So if they matched dollar for dollar in the first part of the year, they may end up with an annual match of 10 cents on the dollar for the whole year, for example.