Discretionary Match

[Nuts]

I administer a 401k plan (not SH) that will be top heavy in the current year (2017) based on last years valuation. Can the Employer amend the plan now for last year (after for the YE)  and add a provision to make a discretionary matching contribution for 2016? With the additional matching funds deposited for 2016, the plan would not be top heavy in 2017 and all of the employees not deferring would not get a contribution. Any guidance would be appreciated. THANKS

[Tom Poje]

I don't believe so, that would be sort of like saying,

"Can I start a new plan after the end of the year"

but very observant to realize plan is going to be top heavy.

but check the wording in the basic document. for example FTWilliam has

 

(d) Qualified Matching Contributions. In addition to any Qualified Matching Contributions provided in the Adoption Agreement, the Company in its discretion may make matching contributions designated as Qualified Matching Contributions for the benefit of such Participants and in such manner determined at the discretion of the Company. The Company may determine, in its discretion whether allocations of Qualified Matching Contributions shall be limited to Participants who are credited with at least a certain number of Hours of Service during the Plan Year and/or who remain in the Company's employ on the last day of the Plan Year. Such Qualified Matching Contributions shall be nonforfeitable when made unless attributable to withdrawal rights under an Eligible Automatic Contribution Arrangement or Qualified Automatic Contribution Arrangement and may only be distributed upon the Participant's: (1) attainment of age 59-1/2; or (2) severance from employment, death, or disability

 

I don't think there is anything in that basic document that says "You must fail the ADP to exercise this option"

so you might be able to give a QMAC to all and accomplish what you want (though it would be 100% vested)

now, the only other possible issue is 1.416-1 T-24 which says when determining end of year balance use the end balance as of 12/31 and contributions that are due as of that date.

normally that would be receivables and, at least in the past would not include 'discretionary contributions' though at one ASPPA Conference years ago an IRS agent voiced an opinion you could include other contributions.

so, if you told someone you were going to give him a contribution, would that make it 'due' and therefore includable.

 

[BG5150]

^ so If I had a $10,000 balance included in the TH calculation for 12/31/16 and I had a SH receivable of $3,000 and a PS receivable of $1,402, my account balance for the TH test would be $13,000?

[Tom Poje]

Quote

 

that was what I was taught when I started in the business years ago, well, that was well before safe harbors. I was taught you included money purchase contribution (a plan subject to minimum funding standards) due but not yet made because it was mandatory, so the logic would seem to be the same for safe harbor, though of course they never amended the regs to say that . (If it was the first year of the plan, for whatever reason the regs say you include the profit sharing as well.(the regs say "however in the first year of the plan, the adjustment should reflect any contribution made after the determination date that are allocated as of a date in the first year.

 

the long winded answer (even longer than some of my sad humor I've posted) is below.

it should be remembered that IRS responses to such Q and As do not necessarily reflect an actual Treasury position.

..........

Receivable Contribution and Top Heavy Determination? Is a discretionary profit sharing contribution for the prior plan year that is deposited after the end of the prior plan year included in the top heavy determination for the current plan year? Let’s say we have a calendar year plan, effective several years ago. We are determining the plan's top heavy percentage for the 2002 plan year. The determination date is therefore 12/31/01. The employer makes a contribution in February, 2002, which is allocated and deducted as of 12/31/01. There is a question as to whether this contribution is included in the top heavy determination for the 2002 plan year. The question relates to Q&A T-24 of the 416 regulations, which says that if a plan is not subject to 412, then the account balances are not “adjusted” to reflect a contribution made after the determination date.

A. The key phrase here is “account balance”. The participants’ account balances, as of (say) 12/31/01, include the profit sharing contribution that is allocated and deducted for the 12/31/01 plan year end. So the guidance regarding “adjustments” does not apply to the receivable profit sharing contribution; it is already part of the participants’ account balances.

The question as to what contributions are considered due on the determination date is determined under §1.416-1, Q&A T-24, which says that it “is generally the amount of any contributions actually made after the valuation date but on or before the determination date”. It then goes on to say that any amounts due under §412 are considered due, even if not made by the determination date. One could take the position that this is a exclusive statement; in other words, if a contribution is NOT due under 412 and is made after the determination date, it is not considered 'due'. However, the answer to the question (T-24), “How is the present value of an accrued benefit determined in a defined contribution plan” is answered, “the sum of (a) the account balance as of the most recent valuation date occurring within a 12-month period ending on the determination date, and (b) an adjustment for contributions...” The term, "the account balance" includes contributions credited to the account of a participant, it does NOT mean only the contributions actually made that have been credited.

For example, if a 100% vested participant terminated after the determination date but before the contribution was actually made, the distribution would include that contribution, even though it had not yet been made to the plan. This is because the account balance, as of the last day of the plan year, includes the contribution. So, when the regulation addresses adjusting the account balance for contributions made after the determination date, we must start with the account balance, and then apply the adjustments. Since the account balance includes the receivable profit sharing contribution, the adjustment does not refer to the receivable. The reference to §412 in §1.416-1 is with regard to a waived funding deficiency that is not considered part a the participants' “account balance”, as the term is defined. Q&A T-24 refers to a DC plan with a waived funding deficiency that is being amortized. Such a plan must maintain an “adjusted account balance” (reflecting the amount of the contribution that has not been deposited) which must be maintained until the actual account balance increases to the point where it equals the “adjusted account balance”. It is to this (unadjusted) account balance that the (waived) contribution must be added, since the amortized contribution only becomes a part of the actual account balance as it is paid to the plan. The requirement therefore has the effect of determining top heavy status as though the contribution required under 412 had actually been made. In other words, the “account balance” would not include the waived minimum funding contribution, so an adjustment is required.

IRS response:

We accept this analysis.

2002 Annual Conference IRS Questions and Answers  #49

[Nuts]

Thank you for your reply. It was very helpful.