BG5150 Posted October 7 Share Posted October 7 403(b) plan has a Discretionary Match, allocated per payroll, no true-up. Match formula is dollar for dollar up to 5% of pay. Participant makes $700,000 per annum. 2024 Comp limit is $345,000. Should they stop the match when it gets to $17,250? (5% of $345k) Or stop when their compensation hits $345k? Or continue the match and we will use $345,000 as comp in the ACP test only? And there is a wrinkle: They changed the match starting August 1 to be only up to 2% What would the annual max be then? Would it be 3.75%? Or $12,075? That’s (7/12)*.05 + (5/12)*.02 : 7 months of 5% and 5 months of 2% averaged. I know it’s a lot here. Just trying to point them in the right direction if/when to stop. Keep in mind these are payroll matches, not annual. QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
Lou S. Posted October 7 Share Posted October 7 It depends how compensation is defined in the document. Not getting into your change in match formula mid-year typically you would calculate the match on a on a per payroll basis but have an annual cap that should not exceed match rate * 401(a)(17) limit. Link to comment Share on other sites More sharing options...
BG5150 Posted October 7 Author Share Posted October 7 But the match rate changes mid year. QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
Lou S. Posted October 7 Share Posted October 7 I don't think it is situation contemplated by the regs or the document so I think the Plan Administrator would need to reasonably decide. I think one reasonable method would be an annual cap of 401(a)(17) * (weighted average of match rate) so using your formula above I'd get an annual cap of $345,000 * 3.75% = 12,937.50. I can see several other arguments for doing it differently but I think that is reasonable and doesn't give HCEs a higher rate of match than NHCE could have. But then you also need to consider any possible cutback issues. Link to comment Share on other sites More sharing options...
Peter Gulia Posted October 7 Share Posted October 7 If the participant’s yearly $700,000 pay is divided approximately evenly over the year’s pay periods, she might have been paid her first $345,000 by late June or early July (and perhaps before the August 1 change). One can imagine the participant might expect the year’s matching contribution of $17,250 (5% x $345,000). If that’s not the administrator’s interpretation of the plan’s governing documents, the administrator might want to be ready with a careful explanation. This is not advice to anyone. Peter Gulia PC Fiduciary Guidance Counsel Philadelphia, Pennsylvania 215-732-1552 Peter@FiduciaryGuidanceCounsel.com Link to comment Share on other sites More sharing options...
Lou S. Posted October 7 Share Posted October 7 I think Peter's post gets to the heart of the cut back issue. In his example the participant may already have the $17,250 match deposited on a per payroll basis which when you test it will be a 5% annual match rate (assuming they don't get any additional match). So you have to be careful about the rate of match as a BRF. Link to comment Share on other sites More sharing options...
Paul I Posted October 7 Share Posted October 7 The match formula is discretionary and allocated per payroll with no true up. If the match is funded with each payroll, as long as the calculation of the match for each payroll is done according to the plan provisions in effect for each payroll, then there should be no need to consider an annual limit. At the end of the year, the plan will need to pass the ACP test and BRF testing of various rates of match. If the match is not funded with each payroll, then that could trigger a need to do true-up calculations consistent with the funding schedule (e.g., monthly, quarterly, annually...) which would be a pain to apply to the time period that included the change in the match rate. Arguably, using the highest match rate during the time period would be acceptable but potentially more costly depending on the length of the time period. Using a weighted average of the match rate over a participant's eligibility during the time period to calculate the true up would be less costly and has some logic associated with the calculation. Again, the end result will need to pass ACP and BRF testing. Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now