Discretionary Match - Cut-back?

[austin3515]

401(k) plan has discretionary match, calculation = ever pay-period, but currently there is NO Match.

Is it too late (for calendar 2014) to change the match calc to a plan year calc? If they were making a match, the answer would be "duh, of course it's not because everyone can only get more." But what if they are not making a match? One could argue that when allocating a fixed sum every pay-period (through a giant excel spreadsheet that looks at every pay-date) vs an annual calculation, some people will get more and some less.

What do people think? Or would the switch only really be permissible if the match is hard-coded into the document (i.e., in that scenario no one can get less)?

[Belgarath]

Off the cuff, it seems hard to consider this a cutback. I haven't looked at the regs, nor have I given this any real thought - just my initial reaction.

[MWeddell]

Once the first pay period of 2014 has ended, then it is too late to change the conditions of how the matching contribution is allocated. Treas. Reg. 1.411(d)-4, Q&A-1(d)(8) fairly clearly provides that the allocation conditions are a protected benefit that cannot be changed retroactive to the beginning of the plan year.

That said, one might be able to amend the document to add another discretionary employer contribution instead of changing the allocation conditions for the existing match. Seems awfully aggressive too -- tell the client to check with legal counsel -- but I can't say for sure that it doesn't work.

[Bird]

I'd argue that each pay period has (had) conditions (having income in the pay period), and since it is discretionary, and each future pay period's conditions have not been met, you can change whenever you want - it's impossible to go back and take away anything from those pay periods that have passed (especially since nothing was contributed!).

I'm not saying it's a slam dunk, but maybe a lay-up.

[david rigby]

Is "...not making a match..." different from a discretionary match of zero?

[austin3515]

That said, one might be able to amend the document to add another discretionary employer contribution instead of changing the allocation conditions for the existing match. Seems awfully aggressive too -- tell the client to check with legal counsel -- but I can't say for sure that it doesn't work.

That's brilliant... Our document has a whole different section for the "additional match."

[KJohnson]

MWeddell, why do you think it is aggressive? Most adoption agreements, like Corbel, have an election for additional matching contributions. Why couldn't you just elect this, not fund the pay period match and fund the annual match.

[MWeddell]

If the additional match provision already is in the plan document, then electing to use it doesn't seem too aggressive. But amending the plan to add a second match formula with its own allocation conditions seems like one is rather directly circumventing the prohibition against retroactively changing a 411(d)(6) protected benefit.

[Tom Poje]

if the match is only going forward, then I suspect the IRS might have issues if the HCEs didn't defer the first half of the year. that just smells.

[Kevin C]

I may not understand the question, but I think you are over-thinking this.

If you are asking if the plan can be amended now to change the discretionary match provisions so that the match level that will be declared for the current year (for example, a 50% match on deferrals not in excess of 6% of comp) is applied for the year as a whole instead of being applied payroll-by-payroll, I don't see how that could be a cut-back, other than maybe a few pennies from rounding. If the match level is consistent for the year, how does someone get more match under a payroll-by-payroll calculation?

Even if you did have a cut-back, your document likely has a provision like ours: "No amendment to the plan shall be effective to the extent that it has the effect of reducing a Participant's accrued benefit." I read that as saying a participant who would be cut-back by the amendment will receive the protected amount regardless of the amendment. If they get the larger of the pre-amendment or post amendment match for the current year, there is no cutback.

[austin3515]

OK, back to this again...

I'm leaning towards adding the 2nd match because I'm concluding that because no match existed there could not be a cut-back by switching to an annual calculation. Also, if the match is declared/funded as a formula (i.e., 25% of the first 4%) then switching from a pay-period match to an annual match would ONLY increase participants benefits (Tom Poje, many of the HCE's are deferring, so there's nothing nefarious going on here, but point taken). And of course a match is always a formula (even if you back into the formula based on the budget). So I just don't see the cutback for the switch.

What I have concluded I cannot do in good faith, based on all of the same logic presented above, is added any allocation conditions. If 2nd match was already in the Plan I would have no qualms about it (others have already pointed out that this would be a horse of a different color). But since I am adding it today, I think it is a cutback to impose allocation conditions on participants who otherwise would have been entitled to the match.

In other words, I should probably be comfortable amending the calculation period from each pay-period to an Annual Match without worrying about adding the 2nd match. But of course adding the 2nd annual match only provides me one more level of defense if anyone were to question it. But adding allocation conditions does not seem to work in my opinion.

Do others agree? Tom, based on your caveat it sounds like you don't have a problem with switching to an annual calculation?

[BG5150]

Is the ER balking at calculating the match every pay period? Can't the payroll software easily do that?

[austin3515]

No, they want to do a match for 2014 but have not decided on the amount, etc. Earlier this year I did an Access Database to calc the match on every 2013 pay-date but it was cumbersome. Obviously if there is an annual deposit the document should be an annual calc. And snce the year is not over for 2014 I have more options than when I was working on 2013.

[BG5150]

Obviously if there is an annual deposit the document should be an annual calc.

Why do you say that? Unless it's a Safe Harbor Match, there is no reason a payroll calculation has to be deposited any sooner than an annual one.

[austin3515]

I agree, it is not required, but it is not a great plan desing (in my opinion anyway).

[buckaroo]

Just reading this now. I would also be aware of the testing methodology. Are they current or prior? If they are prior and there was no match last year, you should consider amending to current.