Missed matching due to calculation by payroll period vs. annual

[Francis]

A 401k PSP has Enhanced Safe Harbor matching with the employer contribution performed "Each Payroll Period". Here and there an employee might miss out on some potential matching if deferrals are large early in the year and are forced to stop before the year ends because of the $18k limit. The match is calculated on compensation per pay period and not over the entire year.

Is there a way to solve this issue so that the employer match is based on annual compensation regardless of the timing of an employee's deferrals throughout the year? Maybe a true-up? This would seem to be more fair to employees who defer irregularly due to a one-time bonus or for some other reason.

If there is a solution, are there any downsides to the employer for making the change to a match based on annual comp vs. each pay period?

[SoCalActuary]

Are you discussing the True-up issue? Do you want to apply it on year-to-date compensation each pay period?

Does your payroll vendor and your plan document provide for this?

[Mike Preston]

True-ups involve, by definition, more work. Hence, higher fees and more chances for things to go wrong. I don't advocate for true-ups if the plan's administrative expense is being borne by the plan itself. The exception is if there are relatively few participants and the increase in administrative expense is minimal.

[Francis]

Thank you. I don't know if true-up is the correct terminology but essentially we'd like to have the plan consider all of a participating employee's annual compensation for purposes of the match.

It seems that some employees who contribute too heavily early in the year miss out on matching dollars because the per pay period calculation caps the match. The match is now 100% of the first 6% of compensation deferred so 6% of an employee's monthly comp is all that's considered, not annual comp.

Ideally we'd prefer to have no employee miss out on matching regardless of how they contribute during the year. Maybe there is a way to do this but if there are downsides to the employer, knowing that could help.

[Lou S.]

What you are describing is commonly referred to a s true up match.

What is sometimes done is you do the match per payroll, at year end you calculate the match an employee would have received under and annual match based on annual pay and annual deferral and subtract out what has already been deposited under the per payroll matching for the year. What is left is the remaining deposit for each employee.

This should be in the plan document I believe and as others have said you have additional caclulations so often additional expense.

[K2retire]

Our document makes a true up discretionary. A plan sponsor has typically done a true up, but has decided that they don't wish to continue doing one. They are asking if they need to provide any notice to the employees. While I don't think it is required, I do think it is a good idea.

What do others do/recommend in this situation?

[pjbaer]

Our document makes a true up discretionary. A plan sponsor has typically done a true up, but has decided that they don't wish to continue doing one. They are asking if they need to provide any notice to the employees. While I don't think it is required, I do think it is a good idea.

What do others do/recommend in this situation?

When we set up a 401(k) plan, this is one of the questions that we ask the plan. If you wait and calculate match at year end, then it will be on the full year of compensation regardless if a participant deferred or not. If they calculate match on a per-payroll basis then if a participant doesn't defer they don't get the match. It is usually a cost saving measure for the plan to match on a per-payroll basis. If a participant is deferring the limit on a couple of payrolls each year then they miss out on match compared to deferring over the entire plan year.