Employer Change Match % Mid-Year

[ERISA-Bubs]

Under the 409A regulations, an employer can change the employer's contribution until the later of 1) the employee obtains a legally binding right to the amount or, 2) the latest date the employee could make an election to defer.

The employer wants to give a match, but wants to be able to change the match % on a payperiod-by-payperiod basis. I think the employer can do this so long as the change is prospective only (i.e. it only relates to compensation earned after the change). This is because the employee does not have a legally binding right to the compensation deferred, to which the match applies, until the employee actually earns it. Does anyone see a problem with this? (please also let me know if you agree).

[ERISA-Bubs]

More information: I spoke with the 409A hotline and they refused to comment on this issue. Is anyone aware of additional guidance on this? Is anyone willing to offer up an opinion?

[Guest George Chimento]

-- More information: I spoke with the 409A hotline and they refused to comment on this issue. Is anyone aware of additional guidance on this? Is anyone willing to offer up an opinion? --

This is an area where the IRS has overstretched in regulating "deferred compensation."

An employer ought to be able to decide when and what it is going to pay an employee, unless the employee has voluntarily deferred an amount to which he or she has a current right of collection. As you know, the regulations stretch that considerably. In the loosey goosey world of 409A, the concept of "legally binding right" is so ambiguous, it's hard to tell what is intended. (There is no definition of "legally binding right" to my knowledge.)

My own conclusion, since our quest to determine the meaning of "legally binding right" essentially means that we look to state law, is:

1. If an employer tells a group of employees that, in a few years, you will get a payment, but based on our application of factors we determine in the future, there is no "legally binding right" until the employer decides what it wants to pay.

2. If the employer has developed a fully locked-in formula, and conditioned payment simply on employment at a certain date, the "legally binding right" occurs on the date the formula is established.

3. If the formula is a combination of the two -- a locked in formula with the ability to vary it based on perception of performance at the payment date, there is no binding right for the variable portion until it is finally established.

So, based on that analysis, there is no reason at all why your question should not have been answered. A variable match, with no assured level of match, provides no legally binding right. At the time the match is determined, the payment terms should be locked in to comply with 409A.

[Just Me]

More information: I spoke with the 409A hotline and they refused to comment on this issue. Is anyone aware of additional guidance on this? Is anyone willing to offer up an opinion?

Ummmmmm....what 409A hotline?

[ERISAatty]

Yeah.... What 409A hotline?

[ERISA-Bubs]

By 409A Hotline, I simply mean the number in the preamble of the 409A regulations. Fair warning -- you will get a voicemail box. I have been told they strive to return calls within a week, so if you're looking for a quick answer, it's probably not the best place to start.

[Just Me]

By 409A Hotline, I simply mean the number in the preamble of the 409A regulations. Fair warning -- you will get a voicemail box. I have been told they strive to return calls within a week, so if you're looking for a quick answer, it's probably not the best place to start.

Ah. A line, but not so hot?