True-ups for only participants hitting 402(g)

[Guest JB517]

I've got a client on a prototype plan that allows for (but doesn't require) a true-up to be made for its matching contributions. It's not a safe harbor. For the past few years, they've only made true-up contributions on behalf of employees who have hit the 402(g) limit. Their theory is that this is fair because these employees are shut off from making additional deferrals to get more matching contributions.

I'm concerned that this might be discriminatory because it's more likely to benefit HCEs, although I don't yet have the numbers to back this up. My first idea was to have them make true-up contributions to all employees for the years affected, but we found out that this is going to cost a boatload of money. My other concern, of course, is that the plan doesn't say that you can make any type of contribution on behalf of people who hit the 402(g) limit, but not others.

I suppose we could try to plug this scenario into the plan retroactively and try to clear it through VCP, but I'm not sure how much luck we're going to have, unless we can show that this is definitely not discriminatory. For what it’s worth, they just got done with an IRS audit and this issue didn't come up.

Anyone have any thoughts or ideas as to where to go from here? I also doubt they're going to want to refund the true-ups for the people who got them, but that might have to be the answer. If you've got any thoughts, let me know. Thanks in advance.

JB

[12AX7]

From what you are describing, it appears that a true-up is to be made for all participants and the employer has perhaps not followed the terms of the plan. I've seen plans in the past that address true-ups for participants that hit the (g) limit, but never in a prototype.

[Guest JB517]

Well, the prototype plan sponsor says (because the plan isn't real clear about it) that the true up contribution is optional. I don't like the idea of providing it for some participants but not others, I just can't think of a good fix that won't be incredibly expensive.

[GMK]

I'm not seeing something here.

In my experience, except in some rare cases, the only people who end up getting a sizeable true up are those who hit the 402(g) limit. Everybody else gets properly matched each pay period, and it all adds up, and there's no more match required. (Yes, if the match is say 100% on 3% and 50% on the next 2%, and a person changes deferral from 5% to 0% in the 4th quarter, the net annual deferral rate may require a true up, but not a big one.)

Apparently you have calculated to see that the under-the-402(g)-limit people actually would be due a "boatload" of true ups. Does that mean they were not properly matched at pay dates? or maybe it's simply a big number of people who are due $20 each.

In any case, I agree with 12AX7.

[masteff]

What's going on w/ their demographics for a true up to be so expensive since most particiants should have received nearly all their match already? Do you really have that many people who were contributing a high % and then quit contributing mid-year to result in unmatched comp? You're comparing your base % of YE plan eligible comp to YE deferrals and using the lesser to calc and compare to YE match? I used to work a plan w/ ~2000 participants with a by-pay-period true up and it wasn't as common as what your results would seem to require.

(I see GMK got in while I was typing/thinking w/ a comment along the same lines)

Unless... my one thought is they messed up comp by including comp prior to the participant's initial eligibility date (which would imply a plan w/ lots of new hires, an easy thing to check). That would blow out the calc fast.

Edit: or by including ineligible comp for that matter.

[TPAMan]

I have a hard time with the idea of 'true-ups' as being expensive. They represent the real cost of the match when the element of contribution timing is eliminated. A 'true-up' match is no more or less expensive than an annually allocated match.