Can "true-up" matching contributions be made on a payroll pe

[EGB]

For plans that are drafted to contain a true-up matching provision (ie, matching contributions are based on annual compensation rather than payroll period compensation), does the Employer have to wait until plan year end to make the true-up matching contribution? I have always seen it done at plan year end once the annual compensation is exactly known. However, I have a client who wants to make the true-up at the time the participants hit the 10,500 limit all at once based on projected compensation for the year, or alternatively, to true-up each payroll rather than waiting to the end of the year. Can this be done? Any comments would be appreciated.

[Dawn Hafner]

I do not think you could make a true-up match based on projected compensation, but doing the true up as the compensation is earned should be acceptable. Just because the compensation used is annual that doesn't mean you must make the deposit annually. Does you plan specify dates at which the matching contribution will be calculated and deposited?

Many pension software programs will allow for a match to be calculated based on YTD comp minus prior match so that the true up is constantly done each matching calculation.

You also need to make sure that these true-ups are done at the same time for participants that need a true-up for reasons other than hitting the $10,500 such as hardship participants or participants varying their percentages widley.

[This message has been edited by Dawn Hafner (edited 05-23-2000).]

[Kirk Maldonado]

I think that you have to do the true-up on an annual basis. The best situation to illustrate this point is where the plan only matches a participant's contributions up to 6% of his or her compensation. Assume that the participant contributes 3% for the first have the year and 9% for the second half. If you computed the matching contribution (only) as you went along during the year, you would get a different result than if you did it at the end of the year.

[EGB]

Dawn and Kirk - thanks for your responses.

Kirk - Would you agree that a payroll period true-up would work for those who hit the 10,500 limit (assuming you did not have to worry about election changes)? Of course, I doubt that the plan could, from a anti-discrimination basis, true-up on a payroll period basis for those who hit the 10,500 limit and true-up on an annual basis for those who have mid-year election changes (ie, true-up could be monthly, but at the point an election change is made, no more true-up would be done until the end of the plan year).

Other than Dawn, are there folks out there who are aware of companies that are truing up on a payroll period basis? Is so, what is the answer to Kirk's point?

[MWeddell]

Yes, I am aware of a few employers who compute the matching contribution each payroll period on a year-to-date basis, in essence doing a true-up every payroll period. There is no need to estimate future contributions this way and no risk that one has overpaid match (assuming that the calculation is programmed correctly).

[Kirk Maldonado]

I think you always need to do a true-up, at least where the matching contributions are determined as a percentage of compensation.

For example, assume that a participant contributed 20% of pay, until she contributed $10,000 (based upon the first $50,000 of her compensation). Assume further than the plan matches 50% of a participant's contributions not in excess of 5% of compensation. Finally, assume that she makes a total of $100,000 during the entire year.

If you compute her match at the time she ceased contributing, she would only be entitled to a match of 5% x $50,000, or $2,500. However, if there is a true-up at the end of the year, she would be entitled to a match of $5,000 (5% x $100,000).

You generally have this problem if the participant contributes more than the "matched" percentage of compensation for part of the year, and less than the "matched" percentage for another part of the year.

[MWeddell]

If the plan is drafted to clearly match only on a payroll period basis, then the true-up isn't required. Beth's original post stated that the plan's match was based on annual compensation, so we've proceeded based on that assumption, which requires a true-up calculation.

One can true up every payroll period or do it at the end of the year. The same amount of contribution dollars will be computed in either case.

I agree with beth that there is a danger of creating a discriminatory benefit, right, or feature if one trues up every payroll period for those who hit the $10,500 limit but waits until after the end of the plan year to true up for everyone else. It's an aggressive position, but not clearly a problem.

[Guest hank]

Our company contributes its match (in employer stock)each payroll period. We generally don't have the 402(g)issue arise for those who are pushing the limit because we have a supplemental nonqualified savings plan which captures 402(g) excess. (Yes, there is a match in the supplemental plan as well). We rarely have true up issues mid-year because of the per-payroll match, but they occasionally arise with employees whose compensation is loaded more to incentive pay rather than base salary or wages.

[Kirk Maldonado]

The problem with matching on a payroll period basis is that you short-change the employees that "front-load" their contributions in the first part of the year. While it is perfectly permissible to do so, I see no policy reason why an employee who elects to front-load his or her contributions during the year should get a lesser matching contribution than somebody who makes pro-rata contributions throughout the entire year, particularly if they contribute the same amount and have the same amount of annual compensation.

I wouldn't relish the idea of having to justify this shortfall to the employee who front-loaded his or her contributions.

[Guest JWBrown]

I think that what MWeddell is saying above is that a payroll by payroll trueup will keep giving some match on payrolls after a person has been cut off by the 402(g) limit. This type of payroll by payroll trueup mechanism compares both the current deferral to current pay and the YTD deferral to the YTD pay. Those employees who front loaded earlier in the year would get the same match by the end of the year as those who spread the deferrals evenly throughout the year.

[Guest Elinor Merl]

I agree with JWBrown. We, too, have several clients who choose to define an amployer match on annual pay, but do the calculation on a payroll basis by comparing YTD compensation with YTD deferrals and employer match. This solves the front loading problem in that employees who front load continue to receive a match (payroll by payroll) up to the point in the year that their YTD deferrals equal the maximum plan match rate as a percentage of YTD compensation.

[MWeddell]

Thanks, JWBrown. That's what I was trying to say.

[Guest Tim Howard]

The big problem with periodic payroll adjustments is that some payroll systems do not provide YTD information, or information for employees not deferring. Without this information each pay period, the adjustments really cannot be made.

This is why many plans adjustments are done based on year-end information, run from a special w-2 report summary.

It may cost more to compile the information per pay period because of a payroll system limitation - factor this into your decisions.

[This message has been edited by Tim Howard (edited 05-31-2000).]

[Guest Sue Patterson]

We also have a per payroll match and are reviewing "true-up" at the end of the plan year. I still have difficulty understanding the calculation to "true-up" each pay period. How would one "true-up" for individuals who change contributions throughout the plan year? Any additional guidance would be appreciated.

[R. Butler]

Sue Patterson,

Its really not that difficult (maybe time consuming, but not difficult) to calaculate true up match on a payroll basis. You just need to keep track of year to date information. Quick example

Person A earns 10,000 per month, defers 10%, match rate is 50% up to 5%. Through June 30, earnings would be 60,000, deferrals 6,000, match 1,500 (this (60,000*.05)*.5)....On July 1 Person A reduces deferrals to 1% of pay. Through July 31, earnings would be 70000, deferrals 10,100, match as calculated via the document would be 1,750 (70,000*.05)*.05). Total match due at 7/31 would be the 1,750 minus the 1,500 already paid. You would do the same thing each month.

Now in my example I kept the numbers simple, year-to-deferrals were always above 5%. This won't always be the case in real life, but the concept is still the same. If you cumiulative year to date info. you can always calculate the match per the document and subtract out what has already been paid to arrive at what is due.

Hope this helps.