Payroll period match and compensation limit

[RPP2001]

A plan uses the basic safe harbor match formula calculated on a per pay period basis per the plan document. A participant’s annual compensation exceeds the $245,000 annual compensation limit (it is actually $901,000). The participant’s deferral percentage each pay period is less than 3% of his pay period compensation, therefore, he received a 100% match of his deferrals each pay period (he deferred $16,500 and received a match of $16,500). This results in a 6.73% match when divided by the $245,000 compensation limit. Is this calculation correct? It does not seem to be, but we haven’t been able to find anything that specifically states how to handle the $245,000 compensation limit with a per pay period match calculation.

[QNPG]

A plan uses the basic safe harbor match formula calculated on a per pay period basis per the plan document. A participant’s annual compensation exceeds the $245,000 annual compensation limit (it is actually $901,000). The participant’s deferral percentage each pay period is less than 3% of his pay period compensation, therefore, he received a 100% match of his deferrals each pay period (he deferred $16,500 and received a match of $16,500). This results in a 6.73% match when divided by the $245,000 compensation limit. Is this calculation correct? It does not seem to be, but we haven’t been able to find anything that specifically states how to handle the $245,000 compensation limit with a per pay period match calculation.

I'm assuming you are speaking of the basic safe harbor match where the formula is 100% of 3%, then 50% of the next 2% - The maximum safe harbor match that can be made on a $245k salary is $9,800. This would be true even if his deferrals were being matched per pay period. Because of his high salary, the cap of 100% of 4% would be reached early in the year.

[Tom Poje]

You just haven't looked hard enough. like finding a needle in a haystack.

shhhhhhhhh. its secretly hidden as a side note in the preamble to the 415 regs

“As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415©(3). However, in applying these two rules, a plan is not required to determine a participant’s compensation on the basis of the earliest payments of compensation during a year.”

if not for that, then once a person deferring 3% hits 245,000 during the year they would be out of luck and couldn't defer more. (thus stuck at 7,350 in deferral!) but that is not the case, beacuse you are permitted to look at things over the whole year.

Still, the max comp at any one point in time is still 245,000, so,

as was noted in the post above, if it's a basic match, then the match should have been capped once it hit 9800.

[MARYMM]

You just haven't looked hard enough. like finding a needle in a haystack.

shhhhhhhhh. its secretly hidden as a side note in the preamble to the 415 regs

“As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415©(3). However, in applying these two rules, a plan is not required to determine a participant’s compensation on the basis of the earliest payments of compensation during a year.”

if not for that, then once a person deferring 3% hits 245,000 during the year they would be out of luck and couldn't defer more. (thus stuck at 7,350 in deferral!) but that is not the case, beacuse you are permitted to look at things over the whole year.

Still, the max comp at any one point in time is still 245,000, so,

as was noted in the post above, if it's a basic match, then the match should have been capped once it hit 9800.

Nor could someone begin deferrals during the year if they had already earned $245,000 that year.

There needs to be a YTD match limit computation in the payroll system (updated when applicable) if that is where the match is being computed . That's what I discovered was missing here when I came on board to process payroll. We had to remove excess matches from the accounts of several employees.

This is a subject that causes a lot of confusion and consternation among payroll people. I'm going to add the link to this discussion to my 401(a)(17) resource document - which also contains the infamous preamble.

[gtech1997]

A plan uses the basic safe harbor match formula calculated on a per pay period basis per the plan document. A participant’s annual compensation exceeds the $245,000 annual compensation limit (it is actually $901,000). The participant’s deferral percentage each pay period is less than 3% of his pay period compensation, therefore, he received a 100% match of his deferrals each pay period (he deferred $16,500 and received a match of $16,500). This results in a 6.73% match when divided by the $245,000 compensation limit. Is this calculation correct? It does not seem to be, but we haven’t been able to find anything that specifically states how to handle the $245,000 compensation limit with a per pay period match calculation.

I'm assuming you are speaking of the basic safe harbor match where the formula is 100% of 3%, then 50% of the next 2% - The maximum safe harbor match that can be made on a $245k salary is $9,800. This would be true even if his deferrals were being matched per pay period. Because of his high salary, the cap of 100% of 4% would be reached early in the year.

This thread is a few years old but I have a similar situation. I certainly agree that the employee in the example above should have his match capped due to the compensation limit but I am unsure of what it should be capped at. The post above suggests $9800 or 4% of $250k which was the compensation limit at the time, but in the original posted said that the employee contributed less than 3% for the year so should they really get the full 4% match even though they did not contribute the 5% required to get the 4% match (match formula 100% of 1st 3 and 50% of next 2)?

We have that situation now - same match formula as previsous example above. Employee making about $340k contributing 3% annually - $10,200. Match occurs per pay period. Should match be stopped when it hits 3% of annual comp limit or 4% of annual comp limit?

[Kevin C]

If the SH match is calculated payroll-by-payroll with no true up, there is no way to get a $340K compensation participant deferring 3% a SH match of $10,600 for 2015 unless you use compensation in excess of $265,000 in the calculation. The SH match calculation is only done on an annual basis if the plan document says it is.

Two possible solutions are 1) better communication with HCE to inform them that the timing of their deferrals affects their match and 2) amend the plan for next year to true-up the match calculation.