Amend discretionary match in SH plan

[MSN]

Can a plan sponsor of a safe harbor plan decide to change the discretionary match formula midyear and still satisfy the safe harbor requirements? From reading the regs, it seems like this is permitted, but I'm having trouble rationalizing this. Most plans that I have seen make the "discretionary" match with each payroll, and the participants know ahead of time what the match formula is from enrollment meetings or highlight sheets of some sort. How does this differ from the concept of a fixed match, which you cannot amend midyear? How are other practicioners dealing with this? Do you allow sponsors to make this change midyear? If not, what authority are you reliant on to disallow the requested amendment?

Thanks for the help!

[Tom Poje]

while I haven't heard anyone doing what you propose, it sounds to me (because you are allocatiing the match on a payroll basis rather than end of year) like you are

'reducing or discontinuing the match' (even if it is discretionary - it sounds like it was 'announced in some way shape or form that for the current year it would be x %')'thus I would hold you fould have to follow the rules specified in the regs.

This obviously prevents the owner from getting a big match in week 1 and then discontinuing the so called 'artificial' discretionary match.

[MSN]

Maybe I didn't explain the situation as well as I should have here. The idea isn't to give a huge contribution in week 1 and then discontinue the "discretionary" match for the rest of the year. I'm thinking of more subtle changes, but maybe the same rules would be applicable...

Let's suppose that when the safe harbor notice is given out in 11/2006 for a calendar year plan using the 3% non-elective contribution, the notice references that the plan may provide a discretionary match. In literature given to participants throughout the year (ie. at open enrollment sessions, payroll stuffers, intranet, etc...) the client informs the participants of the current match formula in place. Let's say that match is 50% up to 6% of compensation. In October, the sponsor decides that they only want to match 25% up to 5% of compensation.

Would you consider this a reduction in the match that would disallow the safe harbor for the year? I think this makes sense from a reasoning perspective, but I cannot seem to find any guidance supporting that position.

Thanks!

[Tom Poje]

perhaps Q-2 of Notice 2000-3 which says (last sentence)

The payroll period method applies only for purposes of satisfying the ADP safe Harbor matching contributions of section 401(k)(12) AND the ACP safe harbor matching contributions of section 401(m)(11)

I have a big problem with the word 'AND'.

a discretionary match fails the first part (it does not satisfy ADP safe harbor.)

[MSN]

I have to say that you lost me there.

Are you saying that a safe harbor plan that makes 'other' discretionary match contributions throughout the year will not qualify as a SH as a result of depositing the discretionary funds into participant accounts before the end of the year, since they will never satisfy the ADP SH? This seems like an odd consequence if I'm interpreting your comment correctly. Have I misinterpreted?

When I read Q-2, it seems like the last sentence is referencing the timing of matching deposits if the plan 1) uses the payroll period method and 2) makes matching contributions throughout the year. In other words, if your making regular match contributions for a plan through the year and the match on Q3 deferrals is made after the end of Q4 due to some oversight, then you have failed to satisfy both the ADP and ACP safe harbors. I could be wrong here though.

[Tom Poje]

well, recall that you originally couldn't even have a safe harbor match on a payroll basis. the Q and A of Notice 2000-3 is what permitted it.

under what other conditions would the last sentence of Q2 apply?

If the match failed safe harbor to start with, then its a moot point. so why didn't they just say, yes, you can do the safe harbor match on a payroll basis.

I suppose you could say its not Both 1 AND 2

but rather

was 1 satisfied

AND then

was 2 satisfied

but then you are left with saying that the regs say if you change a fixed match then you have to run an ACP test, but a discretionary you can do whatever you want every payroll period. (though of course if there is a loophole in the way things are written people will take advantage of them.)

the 4% cap on comp for discretionary was effective 1/1/2000 so some people 'got away' with it in 1999 by providing a larger discretionary match.

regardless, based on you comments, you said the employer 'notifies' people that the discretionary was being changed.

I thought the safe harbor notice was something done 30 days prior to the beginning of the year.