Timing of employer matching contributions to a participant's account

[gle3186]

I would appreciate help on this issue...including law/regulatory citations as appropriate. Some of our staff came from a meeting with a consulting group with a concept they indicated the consultant posited as able to be done. I suspect our staff did not correctly understand the concept and/or details if the consultant but this is what the staff indicated.

A DC plan with a 401(k) component (ours is a pension plan under ERISA 3(2), a DC plan under 3(34) of ERISA, a plan meant to be compliant with 404©, a profit-sharing plan with a 401(k) component) could be amended such that from the effective date of the amendment forward, the company match could be done in a notional manner (that is, not actually making the company match contribution to the participant accounts) and then funding of the company match would only occur (I assume funding with gains/losses of the notional amounts associated with the company match) until a distribution was taken. I gather the theory here is that this is a way to preserve cash (and defer cash contributions) of the plan sponsor.

I quickly searched for guidance/articles concerning when employer matching contributions should be made but other than following the plan document could not find other guidance (although it is probably out there).Of course, there is guidance about timeliness of putting elective deferrals in the participant accounts.

Presently our plan indicates the company match goes into the participant account as soon as administratively practicable following the eligible pay period.

I doubt our plan sponsor would embrace this concept even if it legal. However, I had never heard of such a concept and just wondered if the BenefitsLink retirement community had heard of such or had thoughts about whether such was legal.

Again, this is mostly for my education and to "educate" our staff.

Thanks.

[Jim Chad]

FWIW I see possible problems with Section 415 limits and ACP test.

[Lou S.]

Matching contributions to a 401 (k) can be made a few ways as I understand it -

1 - Along with the 401(k) with each payroll.

2 - Periodically (monthly, quarterly, annually)

In any event you'd need to make them by the due date of the company's tax return (with extensions) for them to be deductible.

I'm not aware of any qualified plan where you can defer deposit of the matching contribution until an employee is eligible for a distribution, that sound more like a non-qualified deferred comp plan to me.

It is possible the consultant is talking about putting a receivable (or accrued) matching contribution on a per payroll basis on the statements for participants but funding the actual match just once a year before filing the taxes, similar to a PS contribution. We used to do that all the time in pooled quarterly balanced forward plans but I don't think it is as common these days in individual accounts on some platform.

I'd ask the consultant to clarify what they are trying to convey.

[Tom Poje]

I have taken my copy of the regs, and, in crayon (I used green, I hope that is ok, not sure what color is permissible) under 1.401(m)-2(a)(4)(iii)© which says to be included in the ACP test

"The contribution is actually paid to the trust no later than the end of 12-month period immediately following the year that contains that date

I have added "Unless the employer only chooses to fund the match once someone terminates"

hopefully that will suffice and at least I will have something to point to if the IRS asks.

I assume the same rule should apply to funding QNECs, QMACs and safe harbor contributions.

[My 2 cents]

I don't work on 401(k) plans, but could someone explain to me how the investment earnings on the employer match would be calculated if the employer match is not invested promptly? The approach described above does involve employer matches generating investment earnings similar to those produced by the salary reduction amounts, doesn't it?

As for Tom Poje's suggestion ("I have taken my copy of the regs, and, in crayon (I used green, I hope that is ok, not sure what color is permissible) under 1.401(m)-2(a)(4)(iii)© which says to be included in the ACP test 'The contribution is actually paid to the trust no later than the end of 12-month period immediately following the year that contains that date' I have added 'Unless the employer only chooses to fund the match once someone terminates'. Hopefully that will suffice and at least I will have something to point to if the IRS asks."), I suggest disappearing ink. Then you could respond to the IRS "I'm sure it was here somewhere!".

[John Feldt ERPA CPC QPA]

So, add the text as Tom suggests:

Unless the employer only chooses to fund the match once someone terminates

Then show the consultant and ask if their copy has the same.

[ESOP Guy]

I agree that was is being described sounds more like a non-qualified plan then a qualified plan.

I would also say seek clarification from the consultants.

[four01kman]

This really sounds like a Supplemental Employee Retirement Plan, usually only for "senior executives". I am not aware of any rule, regulation, etc. that allows the procedure described.

Now I only have been advising clients regarding matching contributions for over 30 years, so I'm sure I have missed one or two things that have occurred.

[Kevin C]

I agree it sounds like they were discussing a non-qualified plan.

For a qualified plan, in addition to the above cite regarding ACP testing, 1.415©-1(b)(6)(i)(B) would apply:

(B)Date of employer contributions.—For purposes of this paragraph (b), employer contributions are not treated as credited to a participant's account for a particular limitation year unless the contributions are actually made to the plan no later than 30 days after the end of the period described in section 404(a)(6) applicable to the taxable year with or within which the particular limitation year ends. If, however, contributions are made by an employer exempt from Federal income tax (including a governmental employer), the contributions must be made to the plan no later than the 15th day of the tenth calendar month following the end of the calendar year or fiscal year (as applicable, depending on the basis on which the employer keeps its books) with or within which the particular limitation year ends. If contributions are made to a plan after the end of the period during which contributions can be made and treated as credited to a participant's account for a particular limitation year, allocations attributable to those contributions are treated as credited to the participant's account for the limitation year during which those contributions are made.

[Tom Poje]

I would agree, if the issue is a non-qualified plan that is something different issue as those are normally not 'funded', usually are for a select group of employees.

since this was not mentioned in the original post I assumed the issue was a qualified 401k.

(and just to make sure, any comments made above are not taken incorrectly, they were certainly not intended to be rude or offensive, but an attempt at a little humor - I did get a chuckle out of John's response in green) makes an otherwise rough day a little lighter!

[ESOP Guy]

I did get a chuckle out of John's response in green) makes an otherwise rough day a little lighter!

I don't know if he made the day lighter he used a pretty dark green.

[John Feldt ERPA CPC QPA]

prettier then?

[GMK]

^than a gob of butter melting on a stack of flapjacks!

Speaking of green, this from the OP:

the BenefitsLink retirement community

brought to mind a brochure with images of a lush, green paradise for BenefitsLink posters when their working days are behind them. The BLRC will have an assisted living section, won't it, Dave?

[austin3515]

that sound more like a non-qualified deferred comp plan to me.

Lou S. read my mind. This guy was talking about a deferred comp plan. Are your "employees" highly paid executives? Based on the fact that your description of your plan surpassed even my ability to describe a 401k plan (note my designations!) it would not surprise me! Much was lost in translation in any event, if Lou S and I are correct.