True-Ups Due to Catch-Ups

[401 Chaos]

Is it customary for plans providing catch-up contributions to automatically provide for or employ a year-end true-up in order for participants to receive full employer matching contributions where matches are made on a payroll period basis?

Plan administrator says their plan / payroll stops permitting any additional employer match once a participant defers maximum 401(k) deferral amount for a particular year (e.g., $17,500). This includes those participants electing to make catch-up contributions and thus attempting to defer maximum deferral amounts for the year (e.g., $23,000). (The Plan in question does not match catch-up contributions.)

As a result, participants who have spread their contributions out evenly across the year reach $17,500 before the last few payrolls and so do not receive any employer matching contribution on the last few deferrals even though a portion of those might generally be thought of as "regular" rather than "catch-up" deferrals. Having the plan stop matching contributions at $17,500 makes sense to me but, strangely, I have not heard of this issue before or found much discussion with respect to the need for true-up adjustments in this context. (I have worked with and have found plenty of discussion of the need for true-ups where participants frontload contributions and so don't defer evenly across the year but, in this case, it's basically the participants' attempts to defer the full $23,000 evenly across the year that causes the problem (e.g., they could try and dump more / most of the catch-up amount in at the very end of the year to the extent possible rather than deferring more evenly but seems they shouldn't have to do that).

Question: Do most plans that permit catch-up contributions include some sort of automatic adjustment provision or perhaps assume a year-end true-up calculation in order to address this issue that the plan administrator may have overlooked in this plan? (If not, it seems this would be a very common and oft discussed issue for participants making catch-up contributions.)

Thanks

[GMK]

As a result, participants who have spread their contributions out evenly across the year reach $17,500 before the last few payrolls and so do not receive any employer matching contribution on the last few deferrals even though a portion of those might generally be thought of as "regular" rather than "catch-up" deferrals.

I'm confused by the last part of this sentence. Once participants defer the basic $17,500, how can additional deferrals be anything but catch-up deferrals?

If the plan document says that all deferrals are matched, then you need a true-up. But the plan sponsor can choose not to match catch-up deferrals. If it was something overlooked, then amend the plan.

[401 Chaos]

As a result, participants who have spread their contributions out evenly across the year reach $17,500 before the last few payrolls and so do not receive any employer matching contribution on the last few deferrals even though a portion of those might generally be thought of as "regular" rather than "catch-up" deferrals.

I'm confused by the last part of this sentence. Once participants defer the basic $17,500, how can additional deferrals be anything but catch-up deferrals?

If the plan document says that all deferrals are matched, then you need a true-up. But the plan sponsor can choose not to match catch-up deferrals. If it was something overlooked, then amend the plan.

GMK--

Thanks for the reply. Bad phrasing on my part above. The additional deferrals above $17,5000 are all squarely catch-up contributions and the plan is clear on not matching catch-up contributions. The thought that the last deferrals being thought of as a mix of "regular" and "catch-up" was really from the perspective of a participant who just became eligible to start making catch-up contributions this year. Last year, she deferred the full amount and received the full matching contribution amount. This year, she was eligible to make a catch-up and so elected that and spread her total deferrals out evenly across the year as well; however, she won't get the full employer matching contribution this year because she hit $17,500 well before the last pay period. Her argument to the plan was that the plan should view her as having elected to spread her regular deferrals across all pay periods so that she would get the match each pay period. While not technically correct, it seems difficult to argue that this is not somehow unfair to her--i.e., a participant doing exactly what you want / hope they will do by taking advantage of the additional deferral opportunity under the plan should not be penalized on the matching contribution front.

I guess I was just surprised that there was not more discussion around this issue in a catch-up context than what I found--seems that would happen with most all plans that permit catch-ups (which I think is a high %) and match on a payperiod basis (which seems pretty common) but do not match on employer contributions (which also seems like the majority of plans).

[BG5150]

If they employer doesn't want to short those people, they should make an amendment to include the true-up.

[Lou S.]

Seems like a victim of the document and the way the match is being done but sounds like the system is simply following the terms of the plan document.

[Kevin C]

Does the plan place a limit on deferrals that can be made for a particular pay period? I'm thinking of:

1.414(v)-1(b)

(2)Contributions in excess of applicable limit

(i)Plan year limits

(A)General rule.—

Except as provided in paragraph (b)(2)(ii) of this section, the amount of elective deferrals in excess of an applicable limit is determined as of the end of the plan year by comparing the total elective deferrals for the plan year with the applicable limit for the plan year. In addition, except as provided in paragraph (b)(2)(i)(B) of this section, in the case of a plan that provides for separate employer-provided limits on elective deferrals for separate portions of plan compensation within the plan year, the applicable limit for the plan year is the sum of the dollar amounts of the limits for the separate portions. For example, if a plan sets a deferral percentage limit for each payroll period, the applicable limit for the plan year is the sum of the dollar amounts of the limits for the payroll periods.

[401 Chaos]

Thanks for everyone's thoughts.

In response to Kevin C, the plan does not place limits on deferrals per pay period, etc. Not sure if I am following the full import of your post, however.

I agree with Lou S that the participant here is just generally a victim of how the match is handled and the way the plan document works.

Given how common catch-up contributions are and the preference of a lot of plans we see not to make a true-up, however, I was just surprised this was not a more often discussed issue or concern and so was hoping I may have overlooked something like perhaps an ordering rule or other automatic adjustment that permits employer matches to continue beyond catch-up participants hitting the regular deferral limit. Based on the replies, however, that does not seem to be the case and seems the plan needs to be amended to add a true-up feature. Welcome any additional thoughts.

Thanks

[GMK]

As BG says,

If they employer doesn't want to short those people, they should make an amendment to include the true-up.

The plan sponsor chooses how the match will work by approving the plan document, and all participants are (intended or unintended) "victims" of the plan document. Sometimes, plan sponsors do not realize and are not advised in sufficient detail of the impact of what they have put in place, but some are open to improvements that are brought to their attention. In any case, you are correct that there is no automatic fix.

[Kevin C]

The cite I posted says you can prorate an employer provided limit and apply it separately to each shorter time period. That can trigger a catch-up determination for a particular pay period even though on an annual basis there would not be catch-up at that point. The examples use a % of pay limit, but I don't see why it couldn't be a per pay period dollar limit on deferrals. It was a long shot, but I thought I would ask.