New Plan delays 401k start, match on what comp

[TPApril]

Brand new 401(k) plan, effective 1/1 of the last year, adopted the year before so 401(k) able to start on 1/1. It's not a safe harbor plan.

Took them awhile to get going with the admin of the 401(k) so they started 2/1 and only matched based on comp from 2/1. Match was done on a payroll basis.

The definition of comp is full year, so I believe the participants who contributed greater than the minimum required for the 3% match have been undermatched. Advisor disagrees. Curious of thoughts.

[Paul I]

Some additional information would help focus a response.

• Is the match on a payroll basis an operational decision or does the plan document specify the match is made on a payroll basis? 
• Does the document specify if there is a true-up at plan year end?

On a separate topic, does the plan use auto-enrollment, and when did employees first meet the plan's eligibility requirements to defer?  These questions may lead to a discussion about a failure to implement/missed deferral opportunity, and possibly there is a match due on January deferrals that were not made.  If this turns out to be the case, good luck with any conversations with the advisor.

 

[RatherBeGolfing]

The document controls.  

If the match determination/allocation period is annual or year end, you use full year comp less any exclusions like pre entry etc. 

I agree that we need more info here, but it sure sounds like 401k and match were effective 1/1 but the employer didn't get their stuff together in time to withhold on the first payroll.  If that's the case, the sponsor cannot use its own failure to follow the document to limit the comp used for match.

I would also take it a step further than @Paul I.  Even without autoenrollment, if 401k and match were effictive 1/1 and the sponsor did not provide an opportunity to defer until February, you have potential MDO and probably owe both match and QNEC for failing to give employees an opportunity to defer in January.

 

[TPApril]

Paul1, RBG - thank you for your input.

Auto enrollment: N/A

Match is based on payroll period; plan doc implies that a true-up is optional. If we were to offer this option to them, I would imagine we would continue whatever they choose for the first year - to true up or not to true up - continually.  My personal preference is to recommend a true-up as it prevents a penalty of sorts to those who varied their deferral rates, or even reached their maximum during the year and ultimately did not receive a true 3% or max match on their total 401(k) for the year.

[RatherBeGolfing]

Optional true-up with a determination period that is more frequent than annual?  Is this a C3 pre-approved document?

[Paul I]

The plan will not need to make a QNEC for actives if the circumstances described are accurate.  The plan could use the 3-month brief exclusion rule or the rolling 3-month rule to avoid the QNEC.  Auto-enrollment, if it were the case here (but it is not) would have also allowed an exception to the QNEC.

Our C3 pre-approved document says a true-up may be optional if the match determination period is more frequent than annual and the match is funded no more frequently than the match determination period.  If the match determination period is more frequent that annual and the match is funded more frequently than the match determination period, then a true-is required.  This is buried in the BPD.

 

[RatherBeGolfing]

40 minutes ago, Paul I said:

The plan will not need to make a QNEC for actives if the circumstances described are accurate.  The plan could use the 3-month brief exclusion rule or the rolling 3-month rule to avoid the QNEC. 

I don't have the rev proc in front of me, but isn't there a notice requirement if you want to take advantage of the brief exclusion rule?  From the OPs description they just started deferrals late.

[Paul I]

The brief exclusion rule (applicable in the first 3 months of the plan year) does not require a notice.

The rolling 3-month rule requires a notice within 45 days after correct deferrals begin, but in this case the brief exclusion rule avoids the need to review what and when anything was communicated to employees about the late start.

 

[RatherBeGolfing]

Cool 👍.  I still get a little mixed up without the Rev proc in front of me

[TPApril]

22 hours ago, RatherBeGolfing said:

Optional true-up with a determination period that is more frequent than annual?  Is this a C3 pre-approved document?

Okay - I see I didn't write my comment very clearly.

Determination period in the C3 plan doc is 'each pay period'.

Actual calculation and deposits are by pay period.

So based on that, no true up?

 

[Paul I]

Since the determination period and the frequency of elective deferrals are the same, then our C3 pre-approved plan would say a true-up is optional (unless the sponsor specifically chose to require an annual true-up.)  You should check confirm that your plan document it contains similar provisions and hopefully you can put that issue to bed.

You do need to address the missed deferral opportunity and the need for the company to make a corrective match of 100% of the match for January that participants would have received if deferrals started in January according to the plan provisions, plus earnings.