401(k) Matching Formula

[Guest boetgerinc]

I would like any opinions regarding the following:

Employee earned $160,000 and deferred $10,000 from 1/1/99 - 12/31/99.

The matching formula in a prototype document is 60 cents on the dollar, not to exceed deferrals in excess of 4% of pay. The match is contributed in one lump sum at year end.

I would calaulate the match for this employee as follows:

$160,000 x .04 = $6,400 x .6 = $3,840 total match.

However, the employee said that her match should be $6,000, and calculated it as follows:

$160,000 x .04 = $6,400

$10,000 x .6 = $6,000

Since the $6,000 is less than $6,400, this is the total match that she is entitled to.

I have been doing recordkeeping for nine years, and would have never calculated the match this way. However, after thinking about it for awhile, it makes sense to me. Have I been thinking "inside the box" too long? Thank you.

[david rigby]

Not to be too blunt, but what does your plan say?

Most plans define the match as a percent of the amount deferred, not as a percent of pay.

[Guest boetgerinc]

Specifically, the adoption agreement reads; "The Employer shall not match Participant Elective Deferrrals in excess of 4% of the Participant's Compensation."

I think that it could be agrued that the adoption agreement does not specifically state to stop matching at 4% of elective deferrals, but at 4% of compensation.

I think that a case can be argued either way that the match is calculated, as long as you are consistant every year, with every plan.

[John A]

You are correct. The employee is wrong. You say that the document reads, "The Employer shall not match Participant Elective Deferrrals in excess of 4% of the Participant's Compensation." If the employee was correct, the document would simply say that Employer matching contributions are limited to 4% of compensation. There would be no need to mention the deferrals.

[Guest GregSelf]

I've seen match defined as a % of comp and a % of deferrals. In fact, most prototypes I've seen define match in terms of eligible compensation. If you fund a $6,000 match, you're exceeding the deferral limit of 4% of comp, above which you're not supposed to consider. In other words, 60% of 4% is 2.4%, or $3,840 total match. You might want to run this past your plan document provider.

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[Ervin Barham]

I agree that you are correct based on the wording you gave. This issue came up a lot in the early days of 401(k) plans. Part of the confusion on the participant's part comes (usually) from the way the plan is explained in verbal meetings. Some one will say that they are going to match "60 cents on the dollar up to 4%". While that is not what the document says, your participant will take that and run with it.

Make sure that the SPD and your informal materials, such as plan highlights, enrollment forms, etc., don't mislead the participant.

[david rigby]

Agreed. The qouted sentence appears to be a maximum constraint, but it still does not define the match. The latter should be defined separately.

Ervin is correct in commenting about the manner of communication.

[Guest Beth N]

Related Question: One of the comments mentioned that it's acceptable to match either on elective deferrals or on compensation. Do you have any guidance or authority for that? I have a client who wants to match 6% of compensation, but only for participants who defer at least 2%. So if 2 participants each make $40k, regardless if Participant A defers 2% and Participant B defers 8%, they both will get a $2,400 "match." This doesn't seem right to me, especially when the match is a discretionary year-end match, in which case it's essentially a profit sharing contribution with a 2% salary reduction requirement tacked on. Thoughts?