Match limits

[Guest MParks]

At a recent conference a speaker explained that the speaker explained that the match limit could only be calculated on the compensation in which the employee deferred, not the annual compensation. Our current research all says annual compensation but does not define it. How do you calculate the match limits?

[Guest Beavis]

Match should be calculated based on the compensation as it is defined in the plan document.

In many cases, if a participant entered mid-year, compensation prior to that point will not be considered. Also some plans calculate match based on compensation for the plan year and some do it based on the compensation for the payroll period.

Check your plan document to see what it says.

[QDROphile]

Testing of matching contributions uses compensation as defined in 414(s) of the tax code. With some oversimplification, this means total compensation. Most matches seem to be a percentage of elective deferrals, subject to a maximum of some percentage of the employee's compensation. I would guess that most plans use W-2 pay with elective deferrals and section 125 deferrals added back as the definition of compensation.

[LCARUSI]

This is the original question (posed as an example by MPARK):

Suppose a participant defers the maximum $10,000 for 1998, and his compensation for the year is $160,000.  His effective deferral percentage is 6.25%.  The employer provides a 100% match up to 5% of compensation.  Now, suppose, instead of deferring his $10,000 evenly throughout the year, he decides to have the entire $10,000 taken out of his first month's paycheck.  Is the 5% match calculated on his one month's salary of $13,333 or the annual salary of $160,000?  We believe the match is based on the annual salary of $160,000 and would entitle him to a match of $8,000.  However, at a recent seminar, the speaker suggested that the match could only be $666.65 (5% of the $13,333 from which the deferral was deducted). 

Here is my response (others are appreciated):

I agree with you that the participant is entitled to a match of $8,000 - unless the Plan has specific language which would require you to do the calculation the other way.  I've only seen such specific language in one Plan.  In that Plan, the language stated that the match was to be calculated based on the participant's basic contributions (first 6%) IN EACH PAYROLL PERIOD.  In the absence of such language, I'm with you.