Capping Discretionary Matching Contributions

[Guest Shaps]

A plan document has been drafted to provide for discretionary matching contributions. The client has been applying a % of compensation discretionary match with a dollar cap ($1000 annually). The plan document does not indicate a dollar cap on the match. Is there a problem in need of remedy under VCP? Can the match be completely discretionary in regards to both percentage and dollar cap as long as both parts of the formula are applying in a nondiscriminary manner?

Thank you for any help or for pointing me in the direction of any guidance in advance!

[Below Ground]

While actual plan language will control, typically documents will say discretionary as to rate and limits. You need to check the document to see what it allows, and just as important, what it does not say. For example, a document may say that the employer can define the matching formula as it sees fit each year. That would allow for caps to be a part of that determination, as the employer defines a formula.

You situation seems to be like the typical language that says "uniform percentage", given the "discretionary matching contributions" in your post. Does a "discretionary uniform percentage" allow for caps? Well, that depends upon what "uniform percentage" is deemed to mean. I am sure that many would say that this means only the match rate. To support the need for having the plan specifically state caps are discretionary, I can tell you that one Volume Submitter I use has languauge that specifically says caps can be defined each year. Also, a very popular prototype has an option for caps to also be discretionary. It would appear that you must have specific language in this regard.

Conversely, I have had a number of clients define that their plan's uniform percentage includes caps. Many of those plans have gone under audit (IRS and DOL) and have passed without problems. Of course, having langauage specifically include caps makes sense if you have the choice in language. I don NOT see a need for VCP. I would "tighten up" language if possible.

Hope this helps.

[Guest Shaps]

While actual plan language will control, typically documents will say discretionary as to rate and limits. You need to check the document to see what it allows, and just as important, what it does not say. For example, a document may say that the employer can define the matching formula as it sees fit each year. That would allow for caps to be a part of that determination, as the employer defines a formula.

You situation seems to be like the typical language that says "uniform percentage", given the "discretionary matching contributions" in your post. Does a "discretionary uniform percentage" allow for caps? Well, that depends upon what "uniform percentage" is deemed to mean. I am sure that many would say that this means only the match rate. To support the need for having the plan specifically state caps are discretionary, I can tell you that one Volume Submitter I use has languauge that specifically says caps can be defined each year. Also, a very popular prototype has an option for caps to also be discretionary. It would appear that you must have specific language in this regard.

Conversely, I have had a number of clients define that their plan's uniform percentage includes caps. Many of those plans have gone under audit (IRS and DOL) and have passed without problems. Of course, having langauage specifically include caps makes sense if you have the choice in language. I don NOT see a need for VCP. I would "tighten up" language if possible.

Hope this helps.

it does help quite a bit, thank you. i had similar thoughts. i couldn't understand why a percentage could be discretionary and a cap couldn't be. the vendor is stating that it must be in the plan doc even though the doc is silent in regards to caps. thank you again for the confirmation.