May a plan change from “no true-up” to “true-up” for a year already begun?

[Peter Gulia]

2017 is about 90% done.

 

Imagine a written plan provides that safe-harbor matching contributions are made on a payroll-by-payroll basis, and that “true-up” contributions will not be made.

 

The employer now would like to provide that matching contributions are recalculated (after a plan year ends) based on the ratio of elective deferrals to compensation for the plan year, and “true-up” contributions are made.

 

May the employer make this amendment effective for 2017?

 

Or must the employer apply the amendment only to 2018 and later years?

 

Which regulation and what reasoning allows or precludes the change for a year already begun?

 

[Mr Bagwell]

I think I'd stay away from changing the true up status for a safe harbor plan mid-year.  Just my opinion.

I don't like taking away money in a true up situation.

And I would hate to see the HCE get more match at true up and see an NHCE get match reduced because of a mid-year change. 

I understand someone wanting to maximize their safe harbor match..... but that falls into a communication with the employee/er and plan design for me. 

[duckthing]

I think you're getting at is whether or not modifying the true-up provision counts as a modification of the matching formula; in other words, whether or nor this change would fall under one of the prohibited changes outlined in Notice 2016-16, a mid-year change to modify a formula used to determine matching contributions. The "at least 3 months prior to the end of the plan year" exception would not apply in this case, given that the year is almost over (I'm assuming plan year = calendar year).

To me, it does. While you could argue this is a modification of a procedure rather than of the formula per se, the result is potentially higher matching contributions to some participants as a result of a mid-year change. I don't know that the argument "well, the matching percentage specified in item X.Y of the AA hasn't changed" will hold up when the end result is additional contributions being made that were not provided for in the original document.

I'm mostly concerned about who's benefiting as a result of the change. Is this mostly intended to help out HCEs who just realized they're losing out on match by contributing the 402(g) max right at the end of the plan year? Of course other people could benefit from the true-up as well, but it seems like this would raise eyebrows. The extremely limited amount of time remaining in the plan year after the notice is given further limits how much benefit NHCEs could get from the change.

Maybe I'm being overly cautious, but I'd wait until 1/1/18.

[Peter Gulia]

Is the answer different if the facts are that the mid-year amendment cannot cause any highly-compensated employee to get a bigger matching contribution than she already had under the no-true-up provisions?

 

 

[duckthing]

That doesn't change my take on it. If anything, specific language to that effect seems like a pretty clear acknowledgement on the part of the plan sponsor that this change is in fact a change to the formula.

[Peter Gulia]

duckthing, thank you for your excellent help.

Only rarely do I work with plans that use any safe-harbor design.  After rereading Notice 2016-16, I understand more about why practitioners grumble that rules against mid-year changes sometimes restrain changes that are not intended to (and sometimes could not) benefit any highly-compensated employee.