True up match

[30Rock]

If a 401k plan has a discretionary match formula, and it is being calculated on a payroll basis, can there be an election to make a discretionary true up match at the end of the year? Does this violate a definite determinable allocation formula? It gives the employer flexibility, rather than being locked into a true up each year.

thanks!

[rcline46]

If doing a true up because the document (always check the document!) states match is on a payroll would disprportionately benefit HCEs, then you have discrimination issues under at least the BRF rules. Doing so would require there either be a section in the document permitting the additional match OR the plan be amended before year end.

It is my opinion that a true up is either required, or you cannot do it.

[30Rock]

Great point on the BRF issue. But is it a BRF if it is required in the plan? My main issue is whether you can make it discretionary and still meet the requirement of being a determinable formula - can a plan document even allow a discretionary true up?

[rcline46]

I do not think it can be discretionary. And if it were, it could not be discriminatory (ie only HCEs actually get the true up).

[BG5150]

If it's a payroll period match, what would they be truing up to? You get match every pay, or at least, it is calculated every pay.

[30Rock]

You know that your deferral may not be even, so an employee, normally an HCE, could max out deferrals early in the year, and then not get any further match. So in essence if you could receive a 4% match based on full plan year comp, you now get much less since you reached the 402g limit early.

My dilemma is can an employer decide to make a true up on a discretionary basis, or does it have to be required? Then they lose flexibility year to year.

[BG5150]

You know that your deferral may not be even, so an employee, normally an HCE, could max out deferrals early in the year, and then not get any further match. So in essence if you could receive a 4% match based on full plan year comp, you now get much less since you reached the 402g limit early.

My dilemma is can an employer decide to make a true up on a discretionary basis, or does it have to be required? Then they lose flexibility year to year.

That is a peril of having a payroll basis match, and poor planning on the behalf of anyone who decided to front-load their deferrals.

I've seen it written in a plan document that the match basis is discretionary, that the ER can decide year-to-year which method would be chosen, but I always thought that had to be decided before the year started. I could be incorrect.

[GMK]

and poor planning on the behalf of anyone who decided to front-load their deferrals.

Generally, this is the case, and it usually applies to a few HCE's.

Just as an example, however, true-up can also benefit non-HCE's. For example (in a plan with a 100% match up to 3% deferral and 50% on 3%-5% deferral), a non-HCE bumps up her/his deferral in April from say 3% (which received a 3% match for 3 months) to say 7% (matched at 4% for the rest of the year). The annualized deferral rate (total deferrals/total comp) ends up at over 5%, but the sum of the per-pay-period matches is under 4%, so she/he gets trued-up to a full 4% match for the year.

[Bird]

While I kind of think it should not be allowed, the Ft. William document allows it, and I've seen other documents with it:

"The Company may make an additional Matching Contribution on behalf of each Participant in the amount of the positive difference, if any, between the Matching Contributions that would have been allocated to his Account had such contributions been determined on the basis of Compensation for the entire Plan Year and the Matching Contributions previously allocated to such Participant's Account."

[rcline46]

I think the language is fine. However as an 'additional match' I think it is subject to BR&F testing. Depending on other match rules, it does not say if EOY and/or 1000 hours is needed.

Knowing my clients, I think BR&F testing would fail almost all of the time.