True-up Matching Contribution - Employment on Last Day Eligibility Requirement

[rocknrolls2]

Company C maintains 401(k) plan X for its employees. Under Plan X, C makes matching contributions on a payroll-by-payroll basis. Plan X provides matching contribuitions on any combination of before-tax 401(k), Roth 401(k) and after-tax contributions provided that contributions in excess of a specified percentage are not matched. When participants' before-tax and Roth 401(k) contributions reach the 402(g) limit, the participant is treated as having elected to contribute an equal percentage of after-tax contributions for the remainder of the year so that matching contributions can continue to be allocated to his/her account. C is considering making an amendment to X which eliminates this automatic after-tax contribution rule and instead permits matching contributions to be paid after the participant's elective deferrals reach the 402(g) limit. If X is amended in such a way, would this feature be subject to benefits, rights and features nondiscrimination testing? I also recall that the coverage regulations provide that if a plan imposes a last day of the plan year requirement as a condition to eligibility to share in an employer contribution, that the employees who fail to meet the requirement would have to be included in the test as nonexcludable employees.

What if X instead were amended to provide a true-up match by comparing employee contributions as a percentage of compensation?

[Jim Chad]

You have told us what the payroll department is doing. But I wonder if the document doesn't already say you should be calculating it the way you want to. Does the document say the match is an annual calculation or a per payroll calculation?

Also, having a last day employment requirement and paying the match every pay has many problems. There have been many discussions here. You may want to do a search.

[david rigby]

Here is one of those discussions:

http://benefitslink.com/boards/index.php?showtopic=43435

[rocknrolls2]

Allow me to clarify a few things. The payroll-by-payroll match is intended to be retained for the regular matching contributions but without a last day requirement while the last day requirement would be applied solely to the true-up conributions. In addition, the plan does contain provisions referring to a payroll-by-payroll match.

[Guest Sieve]

If I undertstand this correctly, the "true-up" here seems just to be a PS contribution, because it's not based on deferrals actually made & therefore is not a true matching contribution. It's really a PS contribution (with a last-day requirement) which is equal to the periodic matching contributions that had been made prior to reaching the 402(g) limit--and, as a PSP contribution given only to those who reach 402(g), it would be unlikely to pass 401(a)(4) contribution testing (or 410(b), for that matter).

[Bird]

I'm not sure I understand. You're saying that if a participant elects, say, 10% for both 401(k) and Roth, and that participant makes $245K this year, that when they hit $16,500 (6.7+% total), that their own contributions are automatically converted to after-tax, right? And those contributions will be matched, up to some percent - what is that, more than 6.7% I hope?

And the company wants to stop the automatic conversion to after-tax...so they can make matching contributions on deferral contributions over the 402(g) limit?!

I don't get it. I think Sieve is on the right track that these are probably profit sharing contributions but...I don't know. Maybe it's just me but I'd need an example.

[rocknrolls2]

sieve and Bird,

Forgetting about the peculiarities of the current plan design, for a moment, I have seen some 401(k) plans continue to provide matching contributions at the same rate that would have applied had the participant not reached the 402(g) limit. I also do not consider such contributions to be nonelective, or profit sharing contributions because they would have matched deferrals had the limit not applied. In fact, I recently obtained a favorable determination letter on behalf of a client that had such a design. At no time did the agent raise the question whether such contributions should be treated as nonelective contributions with benefits, rights or features discrimination issues.

A genuine true-up contribution could be structured either by recomputing the match based on annual compensation or by applying a cumulative percentage of contribution at the time the match is recalculated so long as there is no reduction in the matching contribution credited to a participant's account after the recalculation of the match.

[Bird]

I would have to see the language that says matching contributions are made on phantom contributions before commenting further. It's a foreign concept to me.

[BG5150]

Matching on deferrals that would have happened could lead to a higher rate of match for HCE's I would think (how many NHCE's are putting away 16,500 early in the year?).

My suggestion is to get the HCE's to take 16,500 (or whatever it will be next year), divide by the number of pay periods and make that their deferral each period. This way they get match every paycheck.