Is this a Discretionary Match that Can Be Reduced Now?

[401 Chaos]

Employer has learned of loss of major contract and is facing severe cash crunch. It currently matches 401(k) deferrals 100% up to first 3% of compensation. Employer needs to eliminate matching contribution effective October 1st. Even though there are only 3 months left, the employer needs to conserve this cash rather than simply start with the 2010 Plan Year.

The 401(k) plan document provides as follows:

"The Employer may make discretionary Matching Contributions. The percentage of Elective Deferral Contributions matched, if any, shall be a percentage as determined by the Employer. Elective Deferral Contributions that are over a percentage of Compensation won't be matched. The percentage shall be determined by the Employer. Matching Contributions are calculated based on Elective Deferral Contributions and Compensation for the payroll period. Matching Contributions are made for all persons who were Active Participants at any time during that payroll period. Any percentage determined by the Employer shall apply to all eligible persons for the entire Plan Year."

I am wondering about the effect and intent of the last sentence. The provisions seem to make very clear that the match is discretionary and thus the employer could set any percentage or no percentage at all for the match at the outset of the Plan Year. However, does the last sentence work to make that discretionary match a fixed match for the entire Plan Year once the match percentage is set / used for the initial payroll period?

I have reviewed several prior posts on this board and other discussions regarding the elimination of discretionary matching contributions mid-year and have not found a discussion of a provision exactly like this one. Those discussions have also frankly left me confused about just how much discretion employers have in reducing clearly discretionary matches given my understanding that plans eliminating or reducing matching contributions must pass current availability testing since participants entering the plan after a match is reduced or eliminated will be entitled to a different rate of matching contributions than participants in the plan the entire year. In addition, my understanding is that such reductions in matching contributions create non-uniform formulas for the plan year and thus will need to pass the general nondiscrimination test in addition to ADP / ACP testing.

We are not worried so much about the plan being able to pass these tests if required under our facts--there are not likely to be many new entrants to the plan nor would I think discrimination in favor of HCEs under our facts would likely be a problem. The phrasing of the plan provisions, however, suggests that the rate of the match must be the same for the entire Plan Year regardless of whether testing concerns are an issue. Thus, it seems to me any elimination of matching contributions for the remainder of 2009 would violate that last sentence and that any amendment of the Plan now to delete that last sentence effective prior to 2010 would be problematic.

I would appreciate any thoughts or guidance.

[K2retire]

For the plan year would mean you have to do the same thing for the whole year, not one thing for the first 3 quarters and something else for the last quarter. However, since it is a discretionary formula, matching up to 2.25% for the whole year would be close to the same dollars as matching 3% for the whole year for most participants. If they've already deposited the match, there might need to be some adjustment at year end.

[401 Chaos]

K2,

Thanks for the reply. Could you elaborate on what sort of adjustment would be required at year-end. They have already made all prior matches on a payroll period basis. If a participant who had been partcipating for the first 9 months at 3% deferrals in order to get full match stopped elective deferrals altogether after the elimination of the match and so had no deferrals for the last 3 months of the year, what sort of adjustment would be required?

Thanks

[Bird]

Could you elaborate on what sort of adjustment would be required at year-end. They have already made all prior matches on a payroll period basis. If a participant who had been partcipating for the first 9 months at 3% deferrals in order to get full match stopped elective deferrals altogether after the elimination of the match and so had no deferrals for the last 3 months of the year, what sort of adjustment would be required?

It sounds like the document is written so the match is determined on an annual basis; I guess you could say that the deposits throughout the year were estimates although were probably determined very precisely at the time they were deposited. You should let the dust settle at the end of the year and either: calculate the highest percentage that happened to have been deposited for anyone, and bring everyone else up to that level. or figure out what the employer really wanted and remove money from the accounts of those who got more, and reallocate it. That second alternative is not always pretty but the only way to actually wind up with an effective reduction for the year. I guess there is a third alternative, and that is to take the approach of large payroll companies and just stop the match and not worry about what the document says.

[masteff]

K2's 2.25% comes from (3% * 9/12) + (0% * 3/12). Mid-year terms would blow this out because they wouldn't have any months at 0%.

Your biggest deciding issue: have any employees terminated mid-year and done a full withdrawal from the plan? If so, you have no plan assets from which to do an adjustment. In which case, you simply have to wait until 1/1/10 and change your match then.

If you can't change your match for this year, then you may want to minimize eligible comp for the remainder of the year... like postponing raises and bonuses until after year-end.

[MWeddell]

Another possibility is to amend the plan so that the plan year ends September 30. It wouldn't be my first choice, but it's better than telling the client that they can't change the match until January 1.

[401 Chaos]

Thanks for everyone's responses. The plan has definitely had some participants leave mid-year. Not sure how many have rolled their accounts elsewhere but assume at least some have done so. If so, then it sounds like short of terminating at the end of the month for a short plan year the company would have to seek a return of some of the former participants' match amounts to get to a uniform percentage? I'm afraid that is probably a non-starter even though they need the money badly.

A related / follow-up question: is this uniform percentage for the entire year a legal requirement or something that might have been thought advisable from a testing perspective? I'm not sure I've seen such a provision in a plan document before.

Last question, if this provision is deleted from the plan, could they add a match mid-year without issue if they started 2010 without one? Also, could they also eliminate the match later in 2010 after reinstating if they found they had to stop it again due to an emergency? (I'm assuming they will start 2010 without a match but may decide to add it back later on if things improve. If they do add it back though, I think they would want to have flexibility to stop with a little notice if possible.)

[K2retire]

The problem they are having is because they are depositing as they go along using a document written to make the decision at the end of the year. If they wait until the end of the year when they know what they can afford (or want) to do before making any deposits, the problem is solved.