Amendment period

[Guest Theresa Irvin]

Am I correct in assuming that once a plan year has ended and an employer decides he wants to change the match formula for his 401(k) plan for the plan year that just ended, that he has 2 1/2 months after plan year end to make that amendment?

[Guest T Hoffman]

Of course, an employer can always amend its plan to retroactively INCREASE its matching contribution, but I assume that your example relates to a retroactive amendment that decreases the matching contribution. In that case, a retroactive amendment to change the matching contribution after the end of the year will be prohibited by Code Section 411(d)(6). In fact, unless the plan has a last day of the year requirement, an amendment cannot be made during the plan year at issue (also watch out if retirement, death, or disability during the year entitles employees to receive an allocation of matching contributions).

[MWeddell]

T Hoffman states the rule correctly. See Treas. Reg. 1.411(d)-4(d)(8).

[Guest rshawlaw]

Code §411(d)(6)(A) provides generally that a participant's accrued benefit may not be decreased by amendment. MWeddell refers you to a cite that helps understand the IRS' thinking on this topic. The cite is Treas. Reg. §1.411(d)-4 Q&A 1(d). It's another of the Code's double negatives: "the following benefits are examples of items that are 'not' section 411(d)(6) protected benefits: ....(8) the allocation dates for contributions, forfeitures, and earnigs, the time for making contributions (but 'not' the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied)...." In other words, once the conditions for receiving the allocation are satisfied, the allocation becomes a protected benefit which may not be reduced by amendment. Most 401(k) plans provide that the matching contribution is discretionary; it is the allocation formula that is built into the plan. If the allocation formula is flexible, and the contribution discretionary, the plan would not need to be amended to produce the desired result. For example, discretionary amount of matching contribution may be allocated in tiers: 1st 2% of comp; next 2% of comp; final 2% of comp.

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RWS

[Guest bogart126]

I believe it may be possible to amend to reduce a matching contribution formula in the middle of the year following this logic and I wanted to know what you thought (this is a standardized prototype.): Matching contributions are predicated on if and on what level a participant defers. if a matching contribution is not made until the participant actually makes a deferral couldn't the agrument be made the match isn't accrued until a participant makes a deferral?

therefore, it wouldn't be a 411(d)(6) violation if the benefit has not been accrued and the matching contribution formula could be reduced prospectively during the year.

thank you for your comments.

[M R Bernardin]

I believe it is possible to eliminate or reduce a match during the middle of a year, particularly since it is not a cutback to eliminate the salary reduction contributions on which they are contingent.

[KJohnson]

I received the following from one prototype sponsor who was advised that changing a discretionary match mid-year is actually not a 411(d)(6) or 401(a)(4) rights and features problem but a 1.401-1(B)(1)(ii) problem:

Two IRS agents from the Cincinnati Key District Office verified that a "discretionary" match CANNOT be changed during the plan year. The reason is because changing a discretionary match violates Treasury Regulation 1.401-1(B)(1)(ii) that states a profit sharing plan must provide a definite "predetermined" formula for allocating the contributions made to the plan. Thus, a "discretionary" match must be the same percentage for the WHOLE plan year.

They made it very clear that if the employer intends to change his matching percentage during a plan year, the matching formulas MUST be stated in the plan and the plan amended each time the formula is changed

[Alonzo]

My understanding is that a discretionary match refers to a set up where a discretionary contribution made by the company is allocated on the basis of the employee's deferrals for the period for which the match is made. (The period can be the plan year, the quarter, the month). I have difficulty believing that the Cincinatti Office could sustain a position that the employer could not change the contribution each period, and thereby change everyone's match percentage. All 1.401-1(B)(ii) says is that there has to be a definite predetermined formula for ALLOCATING the contributions made to the plan.

[KJohnson]

I must admit, it came as a surprise to me It may have been keyed to protoype plan language which often refers to a discretionary allocation for a plan year. I suppose if you had different allocation periods stated in you plan document, this might resolve their objections.

[Richard Anderson]

If the plan sponsor matches on a monthly basis, other than the ACP test, what would prevent the owner from deferring $10,500 in the first month, then declare a 100% discretionary match for that period, and then have 50% for the discretionary match for the other 11 months?

[Alonzo]

Rates of match have to be both "currently" and "effectively" available to all employees on a nondiscriminatory basis. "Effective availability" is a smell test (see 1.401(a)(4) -- 4©) designed to prevent the kind of behavior you suggest.