Compliance Issues Unique to Pay Period Match

[Guest Grumpy456]

Are there any compliance issues unique to a plan that computes its match on a pay period basis?

Here's what I am concerned about:

Jackie earns $70,000 and elects to have 25% of her pay deferred each pay period. The plan sponsor makes a $1 for $1 match up to 6% of pay. The match is computed on a pay period basis and her employer uses 26 pay periods per year.

Jackie's gross pay is $2,692.30 per pay period, 25% of which ($673.08 is contributed to the 401(k) plan). Each pay period, the company makes a match to her account equal to the lesser of (1) 100% of her deferrals or (2) 6% of pay for that pay period. Jackie receives a match of $161.54 each pay period. After 23 pay periods, Jackie has made deferrals equal to $15,480.84 and has received matching contributions of $3,715.42. In the 24th pay period, she makes a deferral of $19.16 and receives a match of $19.16. Due to the 402(g) limit, Jackie is unable to make a deferral in the 25th or 26th pay periods (and, as a result, does not receive a matching contribution for either of those pay periods). She makes a total deferral of $15,500 and receives a total match of $3,734.58 (5.34% of "annual pay").

Jackie's twin sister, Erma, also earns $70,000 but she is quite intelligent and after reading the plan's SPD realizes that if she elects to have 22.14% of her pay contributed each pay period she will be able to make the maximum deferral of $15,500, but, unlike Jackie, will receive a total match of $4,200 (6% of "annual pay"). Erma is able to create an extra match for herself of almost $500 just be completing her deferral election form differently than Jackie.

Assume the plan sponsor does not make a "true-up" so that Jackie and Erma both receive the same match.

I know that the ACP test is generally performed using annual pay so that Erma's ACR will be greater (6%) than Jackie's (5.34%). Is there a benefits, rights and features issue since Jackie and Erma are eligible for different rates of match (assume Erma is an HCE via ownership)?

[Jim Chad]

If the document says to calculate it on a per pay basis, you should not do a true up. I have never felt this was fair. FWIW But I have 4 Plans that do this to make things simpler and it does help.

If the document does not have this provision, the assuption is for annual and a true up is required.

[Guest Grumpy456]

Jim, thanks for your comments. The issue I'm most concerned about is whether the plan should be performing a benefits, rights and features compliance test on the match because, using annual pay (which we're required to do for ACP testing purposes) there are different rates of match for different participants. If the match formula said salaried folks get 6% of pay and hourly folks get 4% of pay, then clearly the plan would have to perform a benefits, rights and features compliance test. What if different participants (like Jackie and Erma) receive different rates of match (Jackie 5.34% of annual pay and Erma 6% of annual pay) not because the plan explicitly states that they will, but because Jackie unknowingly elected to have a larger percentage of her pay contributed each pay period?

Maybe a better question is whether the SPD must (1) point out this sort of thing explicitly (so that Jackie doesn't unintentionally deprive herself of the full match) or (2) make is so evident that any reasonable person would not make the same mistake Jackie did.

[Guest Boilerburm1]

You don't have a BRF issue, because each has the opportunity to receive the same benefits - there is nothing in the plan that prevents someone from getting something that another does receive, at least as far as your match is concerned.

I don't think the SPD has to come up with all different possibilities. Now, the adviser, or whoever is "educating" the participants, might want to point it out during the education sessions, but I don't believe there is anything that forces you to document the different scenarios.

[QDROphile]

Just wait until some executive comes and reams you about not collecting the full match. Then you will want have had all sorts of disclosures about the dangers of having such a plan design.

[Jim Chad]

QDROphile, that sounds like experience talking. I have had that unpleasant experience, also.

Other than making sure it is discussed at education meetings, I have not found another way to bring this to the Particiapnt's attention.

Does anyone have other ideas?

[austin3515]

-Put on the enrollment form in bold lettering.

-Circulate a memo to the participants at the beginning of every year.

-Warn people who are at risk for the issue (i.e., high income high percentage)

[Guest CMC]

Sorry to drag up this old chain but I have a related question.

I'm generally inclined to think (it appears like most of you) that where a plan calls for pay-period matching, the best way to make sure folks collect their full match is to coach them to stretch out their deferrals over the full year. If that isn't workable for whatever reason, I've always though the only alternative is to match on a plan-year basis and do an across-the-board true-up.

Today, however, I heard a new idea. A TPA has told a client that it is "legal" to allow a selective true-up for those participants whose deferrals are cut off during the year due to the 402(g) limit -- a group that in this client's case we know to be made up primarily of HCEs. Participants who may have made irregular deferrals for other reasons won't get a true-up. TPA cites to rule about matching rates needing to be nondiscriminatory for support of this idea, saying that b/c the matching rate is the same, the arrangment is non-discriminatory. TPA says that this is part of the template for their approved volume submitter and other of their clients use it.

I have yet to see the document, so it isn't clear to me how this is drafted. But it seems to me that a selective true-up like this is unlikely to pass the benefits, rights and features test, notwithstanding the fact that the rate is the same since, in practice, it is available primarily to HCEs.

Glad for any thoughts you may have.

[Guest UpperGK]

Back to the original post here, the Jackie and Erma example. I have a "Jackie" situation. I advise an employee who can earn 60% of her pay as commissions in a good year, which 2007 has been. EE always wants to hit the 402(g) limit at her company, who instituted a SH plan in 2004. In October of this year, due to a large commission payment, she hit the 2007 deferral limit of $15,500 and the company stopped the match. Plan is a "pay period" match plan with no true-up provision. EE, due to wild swings in commission income, has been a HCE from time to time as well. EE lives distant from company HQ where EB Education takes place (and never attended a meeting) and only discovered this shortfall this year although it has gone on in other years at least since 2004. Employer has refused initial request to address this situation and make EE whole. Thoughts anyone? She has asked the company EB coordinator for any notices on point and has also asked if there are any other EE's in the same position.

[austin3515]

Giving a true-up to HCE's only (or primarily) is a BRF issue. I wouldn't proceed without a determination letter including that language. Perhaps the attorney already has one. Please let us know if he/she does, as I would find this most interesting, because it does indeed come up quite often.