How to apply cap on matching contributions expressed in terms of a per

[Hoard1]

I am having difficulty with a payroll company. We believe we must gross up matching contributions at year end for employees who front loaded contributions in 1999. Definition of comp is w-2. The payroll company wants a cite because their system is not allowing it. Help.

[Dave Baker]

Sounds like a document issue - the definition of compensation for purposes of the limit on matching contributions.

Your plan only makes matches on deferral amounts up to X percent of compensation, earlier deferrals were in excess of X percent of compensation-to-date, but now with a whole year's compensation under its belt the plan finds that some participants' total deferrals during the year are less than X percent of the total year's compensation (e.g. because a participant who had been maxing out earlier in the year decided to drop or discontinue his deferrals mid-year)?

[Hoard1]

Dave more like the opposite. For example employee make 10,000 a month and contributes 10% of pay. Match is 100% up to 3% of compensation In month 10 contributions stop @ his 402(g) limit. At year end he has 120,000 in comp but only 3,000 in match. Our intrepretqtion is that he needs 600 to get his full match for the year. Payroll company is having a problem with this.

[david rigby]

I agree with Dave. This is an issue that centers around how the plan defines compensation and the matching contribution. It may be fixable, via amendment, but be careful about timing of the amendment and to make sure you don't affect something else.

[MWeddell]

That's right, it's a plan document issue. See whether the plan computes the matching contribution, per payroll period, per month, per plan year, or whatever.

[Dave Baker]

My interpretation of the Corbel regional prototype document (which I use) is that the cap of ___% "of a Participant's Compensation" available in the 401(k) adoption agreement refers to comp received during the entire Plan Year. For example, later in the definition of "Compensation" in the basic plan document there is the statement that "Compensation in excess of $200,000 shall be disregarded," which of course refers to the entire Plan Year.

But I suppose a plan administrator could interpret the language differently, and if it has some rational basis for doing so then the administrator's interpretation ought to hold up even under court scrutiny when applying the "abuse of discretion" standard.

Who's the administrator here, the payroll company or the plan sponsor? (Rhetorical question.) Also: what does the SPD say?

Just for fun, here is how I ended up filling in my clients' Corbel 401(k) adoption agreements when they wanted to be specific that the cap is on a per-payroll basis:

I check the box that is used for dollar caps (not the ___% box described above), and then put in this: The matching contribution made on behalf of a Participant for any Plan Year shall not exceed $ the sum of each payroll period's matching contribuiton due on the Participant's salary reduction contributions for that payroll period, where the matching contribution for each payroll period shall be capped at an amount equal to the matching contribution percentage set forth above multiplied by three percent (3%) of the Participant's Compensation for that payroll period.

[david rigby]

Another point: don't get hung up on the mechanics, because that might contradict the intention of the plan. For example, if the payroll system is tracking "matchable contributions" per payday, and the participant is also making additional contributions, then the participant can reach the $10K limit and not have the correct amount recorded for matching. This is merely a mechanical discrepancy, not a plan failure. To avoid this problem requires careful EE communication, and careful design of how payroll and contributions are tracked in the payroll system.

[This message has been edited by pax (edited 11-16-1999).]

[Hoard1]

It is my understanding that if you use one of the safe harbors to pass ADP & ACP you MUST gross up contributions at end of year.