Amendment of Match Formula

[Guest dms9999]

401(k) Plan has match formula of 100% of deferrals up to 1% of compensation with last day and 1,000 hour requirement and allocated on the last day of the plan year.

Owner wants to suspend match August 1, 2009 and pay match through July 31, 2009.

Based on the discontinuence of safe harbor match contribution guidance I believe it is ok to use compensation and deferrals up to July 31, 2009 to determine the match but how would you deal with the last day, 1,000 hour requirement:

1. Allocate the match to those employed on 12/31/09 with 1,000 hours using comp through 7/31/09 OR

2. Allocate the match to those employed on 7/31/09 with 583 hours using comp through 7/31/09.

Any thoughts on the above options or different ideas would be appreciated.

Thanks

[Guest Sieve]

Either of your approaches, I think, would be reasonable (assuming no operational discrimination). (And, I presume this is not a SH plan due to the allocation conditions.) But, I don't think you can do what you want to if the match formula is discretionary (for the reasons described below)

Since there has been no accrual of the match allocation as of 7/31 (based on the y/s & end-of-yr. conditions attached to it), there is no requirement that the match be allocated through that date (if the match formula is specified in the document), so the employer can eliminate or revise the match formula through a plan amendment. However, if the match is purely discretionary (rather than specified in the document, as an ADP match is), then, just as with a discretionary profit sharing plan, there has been an accrual of the allocation formula for those who eventually meet the end-of-year & y/s requirement--i.e., any discretionary match, if one is made in your situation, must be based on full yr. deferral compared to full yr. comp (whatever the eventual match formula might be). So, you can't amend this plan to base a discretionary match on less than the full-year comp allocation formula, or else it violates the anti-cutback rules. (Your comparison of your situatin to the SH match/NEC elimination regs may be a bit misplaced, since that is not a discretionary match formula, so the SH match amendment process may not work in your scenario.)

So, assuming the match is not a discretionary match (and therefore it can be allocated on a different allocation formula if an amendment is made prior to the conditions being met), and assuming no one has yet accrued the match, and assuming that the employer wants to allocate the match for a portion of the year according to the formula in the document, then the amendment which prospectively eliminates the match can change its accrual formula in any way deemed appropriate as long as it is reasonable and does not result in prohibited discrimination. A pro rata portion of the 1,000 h/s and/or a different date could be used, or the conditions could be left unchanged.

[Mike Preston]

I don't want to get into a religious war over this, but doesn't it strike you as strange that a discretionary match has less flexibility than a non-discretionary one? Are you making the analogy to the circumstance described in TAM 9735001? I think that was dealing with an amendment made after the end of the year. Yes, I'm aware that the IRS has attempted, from the podium, to extend its application to amendments made after the date that the hours requirement was met (1000 hour rule) but before (obviously) the last day of the year.

I have had a number of discussions with the good folks in Cincinnati who believe that it is perfectly permissable to amend a discretionary formula before the end of the year, whether or not anybody in the plan has met the hours requirement at that time.

[Guest Sieve]

I am making the analogy you suggest (but may have applied it incorrectly because there's been no allocation formula accrual here: end of yr. not reached).

But, I think there's a method to the madness (although not enough so to get into a religious war). I don't agree that a discretionary match is less flexible than non-discretionary, because discretionary retains the ultimate flexibility of how much or whether to contribute at all. And I do believe that when someone has earned the right to a potential match allocation based on a 3% of comp formula, changing it to 1.5% after the fact is a cut-back--just as when someone who has earned the right to a comp-to-comp PS allocation discovers that his/her portion of the contribution has been reduced due to a change to permitted disparity. A definite allocation formula has been part of qualified plan requirements from the very beginning for a reason.

But it sure would be nice if the Service spoke with one voice on this issue.

[Guest dms9999]

Either of your approaches, I think, would be reasonable (assuming no operational discrimination). (And, I presume this is not a SH plan due to the allocation conditions.) But, I don't think you can do what you want to if the match formula is discretionary (for the reasons described below)

Since there has been no accrual of the match allocation as of 7/31 (based on the y/s & end-of-yr. conditions attached to it), there is no requirement that the match be allocated through that date (if the match formula is specified in the document), so the employer can eliminate or revise the match formula through a plan amendment. However, if the match is purely discretionary (rather than specified in the document, as an ADP match is), then, just as with a discretionary profit sharing plan, there has been an accrual of the allocation formula for those who eventually meet the end-of-year & y/s requirement--i.e., any discretionary match, if one is made in your situation, must be based on full yr. deferral compared to full yr. comp (whatever the eventual match formula might be). So, you can't amend this plan to base a discretionary match on less than the full-year comp allocation formula, or else it violates the anti-cutback rules. (Your comparison of your situatin to the SH match/NEC elimination regs may be a bit misplaced, since that is not a discretionary match formula, so the SH match amendment process may not work in your scenario.)

So, assuming the match is not a discretionary match (and therefore it can be allocated on a different allocation formula if an amendment is made prior to the conditions being met), and assuming no one has yet accrued the match, and assuming that the employer wants to allocate the match for a portion of the year according to the formula in the document, then the amendment which prospectively eliminates the match can change its accrual formula in any way deemed appropriate as long as it is reasonable and does not result in prohibited discrimination. A pro rata portion of the 1,000 h/s and/or a different date could be used, or the conditions could be left unchanged.

The formula is fixed. The basis for allocating the contribution at all is that participants may have based their deferral election on the match formula in the SPD which is why I compared my situation to eliminating the SH match. If the match was discretionary up to 1%, I could just tell the client to make a contribution after the end of the plan year of 58% of deferrals up to 1% of compensation and allocate to everyone who worked 1,000 hours and was employed on the last day of the plan year. This would essentially accomplish teh same thing as using compensation for only 7 months.