401K match on catch up contributions

[Guest Bayousaint]

Our policy states that 401K matches will be made matching an employees contribution of 8% (100% on the first 2%; 50% on the next 6% deferral) up to a $16,500 contribution limit, but also specifically provides for catch up contributions. The policy states that catch up contributions will not be counted toward the matching limit. An employee eligible for catch up contributions contributed the 22,500 to his 401K through regular payroll deduction. The payroll service provider stopped matching contributions after the employee reached $16,500 in total contributions and insists the employee is not eligible for additional matching contributions. The net result was that after semi monthly pay period 19, the employee no longer received any matching contributions.

The payroll service provide insists that because the match is determined on a pay period basis, and not on an annual basis, the affected employee is not eligible for match. Anyone have any experience with this and provide reference/ruling for the PSP?

[Tom Poje]

this actually boils down to whether the plan has 'true-up' language.[not to be confused with catch-up]

for example, a particpant might defer 4% the first half of the year and then 12% the second half of the year. if the plan contained true-up language, then one would expect adjustments to be made.

Ior put another way, such a plan would be considered to provide an 'annual' match, but makes the match on a payroll basis to avoid one large contribution at the end of the year

[QDROphile]

Your payroll service provider is not coherent and and has no business telling anyone what the plan matches or not anyway. Stopping the match at $16,500 of elective deferral is not likely a function of matching based on payroll periods. If the plan says match on catch up amounts, then match. If the plan matches on a payroll period basis without a true-up, then you have to step through the contributions pay period by pay period to see if the periods have the effect of reducing the potential maximum aggregate match. That can happen. But determining if plan provisions have been followed is the job of the plan administrator, not the payroll provider. The payroll provider is likely to try to justify its inferior product or services by blowing smoke about qualified plan rules.

[Guest Bayousaint]

Makes sense. Does the company have any liability if the pay period approach effectively reduces the matching for employees making catch up contributions? The logic goes, by reducing the annual match (because of the payroll period basis for making the match and the $16.5K limit) employees who participate in catch up contributions are treated in a discriminatory manner.

Thanks

[QDROphile]

First describe in detail how the payroll period match design has an adverse effect on matching catch-up contributions. The premise of the question is not clear and is suspect.

[Guest Bayousaint]

First describe in detail how the payroll period match design has an adverse effect on matching catch-up contributions. The premise of the question is not clear and is suspect.

The plan limits contributions eligible for company match to $16,500. Employees are eligible for 5% company match on 8% defferred contributions, up to the $16,500 matching limit. The plan states that catch up contributions will not count toward the $16,500 matching limit. An employee eligible for catch up contributions make a total of $22,500 in contributions through regular payroll deductions, expecting to receive the maximum match of 5%. However, PSP stops matching contributions after bimonthly payroll period 19, when the employees reaches the $16,500 limit. The PSP provides no match to the employee for payroll periods 20 - 26, and therefore the employee receives a lower net match than if he had not made any catch up contributions. Is such a practice discriminatory, and does the company have any liability to the employee by refusing to correct the PSP's cessation of match. The employee claims that the PSP and company's practice is discriminatory toward those who participate in catch up contributions. A table below explains the issue. If they employee had not made any catch up contributions, he would have received a matching contribution for each payroll period, totalling $7500. Instead, his matching contribution was cut off after the total contributions reached the plan matching limit of $16,500.

Period Employee contribution Company Match Total Employee Contributions

1 $865 $288 $865

2 $865 $288 $1,730

3 $865 $288 $2,595

4 $865 $288 $3,460

5 $865 $288 $4,325

6 $865 $288 $5,190

7 $865 $288 $6,055

8 $865 $288 $6,920

9 $865 $288 $7,785

10 $865 $288 $8,650

11 $865 $288 $9,515

12 $865 $288 $10,380

13 $865 $288 $11,245

14 $865 $288 $12,110

15 $865 $288 $12,975

16 $865 $288 $13,840

17 $865 $288 $14,705

18 $865 $288 $15,570

19 $865 $288 $16,435

20 $865 $41 $17,300

21 $865 $0 $18,165

22 $865 $0 $19,030

23 $865 $0 $19,895

24 $865 $0 $20,760

25 $865 $0 $21,625

26 $865 $0 $22,490

Total $22,490 $5,521 $22,490

Maximum Match $7,500

[QDROphile]

Going back to your original post, I misread the message. I thought the plan provided for matching catch-up contributions. Let's get that out of the way first. The IRS preamble to the regulations says that a plan cannot provide that it will not match catch-up contributions. However, the regulations don't say that, and one could get around the proscription anyway, so we can drop the subject if we want to limit the discussion to legal matters. Policy is another matter.

With my misunderstanding out of the way, the problem is the pay period by pay period match (as correctly discerned by Tom Poje), but I have not seen this particular phenomenon, the employer would have no liability for instituting a pay period by pay periond match. However, the fiduciary might have some liability for not properly explaining to participants the dumb ass nature of how the system works, the potential for getting screwed, and the approach that can be taken to avoid being screwed. It would be a a stretch, but the failure might also be parlayed into a violation of the rule aginst impediments to catch-up contributions. Check the SPD and other communications about elections. If there is not some warning about the unobvious problem and the potential for missing the maximum match by a reasonable elective deferral schedule, the fiduciary should be concerned. This arrangement is particularly sinister. An even deferral schedule is a typical the solution to the usual version of problem. But shame on the employer even if there is no liability. A true up is the best practice. Why set up an employee benefit and then make it tricky?

[Kevin C]

There is a discussion in the preamble to the final 401(k)/401(m) regulations about why catch-up contributions can not be excluded from receiving a safe harbor match. But this example matches deferrals up to 8% of compensation, so it doesn't sound like a safe harbor match. I don't remember anything like that for a regular match. Our VS document allows catch-ups to not be matched, but only for a non-safe harbor match.

I agree the problem here is the payroll by payroll match with no true-up. I also agree a true-up is the best practice. Without the true-up, timing of the deferrals can have a negative impact on the match received.

There is one other plan provision you should check into. Are there any special rules on the catch-up contribution? The plan could apply the catch-up limit on a pro-rata basis each pay period. If it does, that might take care of this issue.