Discretionary Matching

[SwimmingInBowelsOfERISA]

I ran into a friend of mine recently who was frustrated with her ER over the 401(k). Apparently the ER customarily announces a discretionary match to the 401(k) - (no P/S component) - at the beginning of the year, and discloses it to the EEs in writing. However she was just informed here in April of 2014 by the HR manager that the company has decided not to make the previous year's match already declared (2013) due to profitability issues.

I understand that there can be a lot of leeway with what an ER can do if it is in the plan docs and doesn't violate ERISA, so I asked her to get a copy of her SPD/SMM, which will give me a starting point. I'm an Investment Adviser and not entirely familiar with plan design issues, but I would think that if they are disclosing in writing the the EEs at the beginning of the plan year what the matching contribution is, they couldn't rescind that declaration after the plan's year end.

Does anyone have any thought on this?

FYI - I prospected this ER last year and spoke with one of the execs, who in conversation told me he had heard of 408(b)2 but they didn't have to comply with it...so obviously this is a plan with suspect management to begin with.

[QDROphile]

It is all about what the plan (and maybe the SPD says) says. If the announcement locks the contribution, then it is required. That is unlikely. One might make claims on equitable grounds, such as promissory estoppel, but those are very tough to win. This all goes into the chapter entiteld "Discretionary Matching Contributions Suck for so Many Reasons that an Employer Should Be Ashamed for Having Them as a Plan Ferature."

[ESOP Guy]

This all goes into the chapter entiteld "Discretionary Matching Contributions Suck for so Many Reasons that an Employer Should Be Ashamed for Having Them as a Plan Ferature."

It would suck more if the employer has a cash flow crisis because it was required to make a match. What hapened here is bad as expectations were raised and people made very reasonable plans based on company communications. I get it and understand the emotions and thinking in this case.

On the other hand life does happen and kicking the employer while he is down isn't going to make things better either.

[Kevin C]

There is nothing wrong with a discretionary match. However, I can't imagine why anyone would announce a discretionary contribution level to participants before they were absolutely certain the contribution would be made. They may have an employee relations nightmare on their hands, but the terms of the document will determine what, if any, match the participants receive.

I can also understand a plan sponsor that thinks he doesn't have to comply with the 408(b)(2) disclosure rules. Those rules deal with required disclosure by covered service providers. The plan sponsor receives those disclosures, he doesn't have to make them. Now, if you had asked him about 404a-5 disclosure and he said his participant directed plan doesn't need to comply, I would agree there is a problem.

[SwimmingInBowelsOfERISA]

There is nothing wrong with a discretionary match. However, I can't imagine why anyone would announce a discretionary contribution level to participants before they were absolutely certain the contribution would be made. They may have an employee relations nightmare on their hands, but the terms of the document will determine what, if any, match the participants receive.

I can also understand a plan sponsor that thinks he doesn't have to comply with the 408(b)(2) disclosure rules. Those rules deal with required disclosure by covered service providers. The plan sponsor receives those disclosures, he doesn't have to make them. Now, if you had asked him about 404a-5 disclosure and he said his participant directed plan doesn't need to comply, I would agree there is a problem.

Thank you for your input Kevin! When it came to the discussion about 408b2, I was informing the exec of the responsibility of the fiduciary to collect the disclosures from the providers, and corresponding responsibility to analyze and and benchmark the plan, to which he responded they did not have to comply with - I don't think he was under any illusion that he had to create or share that information with anyone outside of the decision structure. I explained to him about the prohibited transaction rules for transactions with CSPs using plan assets, and requiring "reasonableness and necessity" be determined through collection, analysis and benchmarking plan fees and expenses. He was generally uninterested and reiterated that he was sure it didn't apply to them. Thus my conclusion that the plan was likely being poorly managed.

[Gadgetfreak]

Check the written "announcement" too. Does it say we WILL make or we INTEND to make? Sometimes EEs can read into the language because we all see what we want to see.

[QDROphile]

The only uncynical way to justify discretionary matching contributions is fear so great that it overcomes logic and integrity.

[John Feldt ERPA CPC QPA]

Nothing prudent about making a promise that can't be kept, sure.

But it seems prudent to me to state the obvious by saying we have no crystal ball and so we don't know the future, thus the match is discretionary.

QDROphile - do you work for Apple where year-end cash exists no matter the revenue stream for the year? Okay, just kidding.

Back to the original post, I agree with RPG that it would be nice to see the announcement of the match. Perhaps it was worded to say if we can afford a match, we will match up to 100% of the amount you defer, ignoring any deferral over 6% of your compensation. However, that is merely the structure of the match. If our revenues cannot afford any match, there will be no match. If we can afford half the match, then instead of 100%, we would match 50%.

[John Feldt ERPA CPC QPA]

I guess a discretionary profit sharing would be similar, needing fear that overcomes your integrity?

Only a DB plan or money purchase plan then?

[QDROphile]

Profit sharing plans are philosophically compatible with discretion and variability based on economic results. Going to the root of the name (no longer technically relavant), the contribution is a share of the profits. No profits, or not enough profit, no share or smaller share. One can find cynicism in anything, but the factor is not so high in profit sharing. Match is entirely different. Matching contributions are not based in how profitable the employer may be. A match is offered for other reasons, if reason has anything to do with the decison. Or a match might be cynical. Just take a look at all the posts about bizarre matching formulae with a purpose to skew contributions to the owner or highly compensated -- the question is, in essence, "can we get away with this"?

I am aware that matching contributions are in the profit sharing category. You know what I mean.

[Tom Poje]

somewhat along similar lines the follow from the 2007 ASPPA Conference

Q19) [A previous non safe harbor plan] Safe Harbor 401(k): A notice is issued indicating a safe harbor contribution will be made for the upcoming year, but the plan was never amended to contain safe harbor language. Now that it is after plan year end, it is too late to amend to correct the problem. Is the plan on the hook for the contribution, and must also run all appropriate tests?
A: Notwithstanding the notice provided, the plan terms do not provide for the safe harbor plan. Therefore, you should follow the plan terms and run the ADP test as needed. (Whether there is a Title I issue due to the notice is in the purview of the DOL.)

emphasis mine. Basically agree with Kevin's response, there might be a nightmare between employee/employer, but the document still only says discretionary. the employer may fully have intended to provide a match at the start of the year. I would certainly doubt a motive "I can get the ADP test to pass if I trick the people into deferring by saying I will provide a match"

in fact, based on the comments provided, the company has been able to provide a match in prior years. I suppose if the company had a real good year and they doubled the match they said they would provide at the start of the year one should complain as well.