Not getting the full benefit of a match - true-up provisions

[Guest Hardy Eubanks]

Beth, assume the following:

The match formula is 50% of first 6% of compensation. Now assume that through August, EE has deferred $10,500 on compensation year to date of $105,000. This is a 10% deferral rate, yet the match is limited to 3% of compensation, or, $3,150. Now through the end of the year, compensation is $170,000, but no more deferrals can be made due to the 402(g) limit. The match now should be 3% of $170,000 or $5,100. So, if the language in the document is based on per payroll comp, then match would be $3,150. If based on annual compensation, then match would be $5,100. Therefore a "true-up" match contribution would need to be made as of the end of the year. Hope the math worked and this helps.

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[EGB]

Will someone please be kind enough to provide me with a numbers example of the following problem and how it is resolved: Assume highly compensated employee makes a deferral election and by August of the year, maxes out at 10,500. At that point, matching contributions cease. It is my understanding that such participants may not be getting the full benefit of the matching contribution and that the plan can be designed to allow a true-up of matching contributions at year end; the way to do this in the plan is to base the contributions on annual compensation rather than on payroll period compensation. I would be very appreciate if someone could provide to me a numbers example that shows how a participant doesn't get the full benefit of a match when he/she maxes out on deferrals mid year when the compensation is based on payroll period compensation and/or how this is fixed by basing it on annual comp. Obviously, make any assumptions you want regarding the deferral election percentage, the applicable match and the compensation. Thanks in advance for any comments.

[Alf]

FYI - The problem can also occur in a plan that calculates and allocates matching contributions on a payroll (or monthly or quarterly) basis if an employee changes deferral elections during the year from an amount that is over the plan's match limit on deferrals to an amount below that limit.

For example, if the plan matches deferrals of up to 3% of comp. and an employee deferrs 4% of comp. for Jan-June and then changes his election to 2% of comp. he deferred a total of 3% of comp. for the year and should have received a match on all of it, but he only got a match on 5% of compensation.

Both examples (10,500 cap and changes in elections) involve front-loading deferrals during the year and can usually be solved by providing employees with examples or explanations along with their deferral election forms.

[EGB]

Thanks so much for the examples. They were very helpful. Before the example, I was limited in understanding this because I did not realize that matching contributions could be made on deferrals that were not made due to the 402(g) limit; that is, I had assumed that one who was capped at 10,500 could only get a match attributable to the 10,500. However, from the example, the match is based on the amount that would have been deferred absent 402(g).

A typical Corbel document (using annual compensation) will say the matching contribution is ____% of a participant's "Deferred Compensation." "Deferred Compensation" is then defined as "the amount of the Participant's total Compensation which has been contributed to the Plan in accordance with the Participant's deferral election . . ." Under this definition of Deferred Compensation, would the appropriate reading be that you look at the amount the participant chose to defer (even though such amount may have been capped at 10,500) or only the amount that actually got "contributed"? I would generally read this as only the amount that actually got contributed.

[This message has been edited by beth beaube (edited 02-23-2000).]

[MWeddell]

The match is calculated based on only the amounts actually deferred. The thrust of the examples given previously is that one looks at compensation (not in excess of 401(a)(17)) and deferrals for the whole year, including compensation earned after deferrals reached the 402(g) limit.

Let's take Hardy's example and add the assumption that the plan year is the calendar year. At the end of August, the year-to-date match is the lesser of 50% times $10,500 and 3% times $105,000, which equals $3,150. At the end of December, the year-to-date match is ther lesser of 50% times $10,500 and 3% times $170,000, which equals $5,100. Notice that we're not assuming that more than $10,500 is contributed. Instead, the higher match results because we're considering the entire $170,000 of compensation.