Increasing the match mid-year

[fiona1]

Employer has a 401(k) and DB plan - both 1/1 plan years. They freeze the DB plan effective 6/30/08 and agree to increase the match on deferrals to the 401(k) plan effective 7/1/08. Does this create any testing or nondiscrimination issues? Does it create the need for a current availability test?

For example - assume the match on 1/1/08 was 50% up to 7% of pay. And on 7/1/08 it's increased to 55% up to 7% of pay. If someone contributed $15,500 during the first 6 months of the year - then they will not benefit from the match increase. But if someone contributes $1250 per month, then they will be able to receive the bump in match from 7/1/08 to 12/31/08.

Any thoughts?

[Guest Sieve]

Yes. It has to be tested for both current availability and effective availability (the latter being the more problematic).

This may (or may not) help: http://benefitslink.com/boards/index.php?s...ic=39583&hl

[J Simmons]

LOL (or not).

Good one, Larry.

**********

[ERISAnut]

I wouldn't necessarily agree with that. The plan is subject to prospective amendment at any time; even if contributions are discretionary and the employer through it's discretion decides to increase the match each year.

The rate of match, in this instance, would be applied to all employees in the same manner. This, Sieve, is consistent with the current availability. We agree.

The effective availability, being based on facts and circumstance, is just that; subjective in nature. It would be difficult to pose a compelling argument that this amendment timing would provide a significantly higher advantage to HCEs than NHCEs for this reason; since the same formula is being applied across the board during each payroll period.

I am thinking of the case of a true-up match at year end. If provided, everyone is ensured exact same 'rate of match' for the year. If not, then everyone is still assured exact same 'rate of match' for each payroll period. A problem, in this case, would appear to occur if the true-up feature was only allowed for a distinct class of employees comprising of mostly HCEs.

But, I am having the issue with the fact that this is merely a prospective decision. Outside of the amendment timing being discriminatory, I wouldn't think it would be a BRF issue.

However, to find common ground, I would consider applying the additional match retroactively to the 1st of the year while adding a true-up feature. Most times, it will be the HCEs who max out early in the year and would be adversely affected, so this option may not be necessary.

But, by the same principle, if the employer were to prospectively discontinue matching at some point in the year, wouldn't the same rules apply. I wouldn't believe this to be a BRF issue, but a mere strain on the ACP test. Just my opinion.

[J Simmons]

I'm inclined to agree with ERISAnut. The ACP test applies on a yearly basis. I'm not sure current availability/effective availability of a BRF necessarily does.

[Guest Sieve]

The cast is the same: Act II . . . But, it's late and my brain is probably working slower than usual (I know, that's hard to imagine . . .!!)

As suggested by ERISAnut, this certainly is a matter of a potential discriminatory amendment (as every mid-year amendment runs the risk of being). In addition, however, because it produces a second rate of match, I think it also becomes a BRF issue (just as I believe it would if the match were discontinued during the year). Perhaps both end up being merged into a single component. But, I believe you do have to test the separate rates of match since 401(a)(4) testing (including both BRF testing and discriminatory amendment testing) is generally determined on a plan year basis (Treas. Reg. Section 1.401(a)(4)-1©(3)). (Note that this same issue was raised by Laura in the prior thread (at posts #21 & #23), and this cast of characters, presumably worn down by the discussion, made no substantive comment.)

Without knowing the precise facts and circumstances--which is the standard on which both the discriminatory amendment test and the effective availability test are based--I don't see how ERISAnut can uneqivocably suggest that "t would be difficult to pose a compelling argument that this amendment timing would provide a significantly higher advantage to HCEs than NHCEs". But I do agree that the proferred solution (retoractively applying the higher match, among other things) would work, but may not be practical since the DB benefits were accruing during the first half of the year. I would be more concerned about demographic issues than early maximization of deferrals prior to the match increase (contrary to the concerns of fiona1).

And, of course, this discussion may be for naught in these facts, because there's probably not much discriminatory about increasing the match percentage from 50% to 55%. In fact, it would be difficult to pose a compelling reason why the separate rates of match would provide a significantly higher advantage to HCEs than to NHCEs . . . (Seems like I've heard that somewhere before . . .)

By the way, anyone have an idea how you would true up a match in a year where there was a mid-year change? Would you true up before the change and then again after the change (using only comp during the specific match formula's period of applicability), or would you do a weighted average fo the match rate during the year and true that up, or something else?

[ERISAnut]

By the way, anyone have an idea how you would true up a match in a year where there was a mid-year change? Would you true up before the change and then again after the change (using only comp during the specific match formula's period of applicability), or would you do a weighted average fo the match rate during the year and true that up, or something else?

In order to true up, there would have to be one formula for the entire year. That formula should be the highest one. Hence, an amendment to add true-up (which is basically applying the formula on an annual basis instead of payroll period basis) should be retroactive to the beginning of the year (and should therefore be a higher formula to avoid any cutback).

It is more of a sync-up prior to the true-up. What it does is create a pattern of amendments to avoid the issue and stay safe; especially when the additional dollar costs are deemed negligible to the company.

[Guest Sieve]

-nut --

Do you think this retoractive method is the only approach to true-up in those circusmtances? Suppose the employer only really has the desire (and the cash) for the increased match for the second half of the year, and cannot afford to increase retroactively (although I guess a reduced retoractive match might be an option)? Is there any other method of truing up--e.g., with some kind of melded rate--that might work?

[QDROphile]

You want thoughts? Your original post shows clearly what is wrong with the idea of a mid year rate increase applied prospectively, even forgetting about the compliance issues. It is unfair and it it departs from what a match is all about. If the employer wants to make up for the loss of the db benefit, spread the mitigation around the same group that suffered the loss. Don't mitigate by a match that is really a mismatch in the larger sense.

[Guest Sieve]

-phile -- Assume I agree with you that it's a bad idea to increase a match prospectively in mid-year, and that I have to perform a BRF test (my belief) and all the rest of it, and some employees are angry that they aren't able to use the increased match as much as they'd like (don't know if you were referring to my first post or the OP, which was not mine). Assume no client of mine would ever do that if I got to them before the fact. Fine. But my client, say, has a discretionary match in the document, and doesn't tell me until year-end that the match was increased as of 7/1 and that all employees were told of the increased match. Or, say the mid-year announcement indicated that the match was eliminated entirely, or otherwise reduced, prospectively. The document has true-up, end-of-year language. On a practical level--since I can't take my client by the scruff of the neck & tell him/her not to do what he/she already did 6 months ago--how do I perform the true-up if the match has not been at the same rate during the entire year?

My thought would be to do a true-up for separate protions of the year, based on the %-age match for that portion of the year. That seems like the only fair way to do it.

[ERISAnut]

-nut --

Do you think this retoractive method is the only approach to true-up in those circusmtances? Suppose the employer only really has the desire (and the cash) for the increased match for the second half of the year, and cannot afford to increase retroactively (although I guess a reduced retoractive match might be an option)? Is there any other method of truing up--e.g., with some kind of melded rate--that might work?

Not really. But the true essence of a true-up is to have the formula applied over a unique period extending beyond a single payroll period. It could be monthly, quarterly, semi-annually, or annually.

I would seldom speak in absolutes as everything is ultimately subject to what the employer sees as less risky. Have seen two different employers take opposites sides on what one term written in a prototype document means. Whenever possible, I look first to avoid the issue. When not possible, as in your fact pattern where the employer has expense concerns, then there are other methods the employer would consider. However, a reduced retroactive match is NEVER an option (the seldom absolute) as it would violate 411(d)(6).

[Guest Sieve]

-nut --

I agree absolutely that you cannot reduce the match retroactively. No question about that. What I meant by a "reduced retroactive match" (now spelled properly) was not exactly what you think (& my language was not very precise).

Say a client wants to increase a match mid-year from 5% to 8%, but, despite my pleas to make it effective back to the first of the year, cannot afford to make the 8% match retroactive for the full year. So, I suggest that the potential prospective 8% match be reduced to 6.5% and that the new 6.5% match be made retroactive. Hence, the potential prospective match is reduced (from the client's intial amount of 8% to 6.5%) and it then is turned into a retroactive increase to all -- as you suggest, looking to avoid the issue.

[ERISAnut]

Sieve,

I agree with your logic. It certainly avoids the issue and continues to remain within the employer's budget.