Is it more common to calculate an employer matching contribution on a

[card]

Is it more common to calculate an employer matching contribution on a payroll by payroll basis, or on an annual basis?

For example, assume employee A's compensation is $200,000, and she contributes 10% pre-tax. The employer matches contributions up to 6% of pay, on a dollar for dollar basis.

If the match is calculated on a payroll by payroll basis, the employee will hit the 402(g) limit after receiving pay of $105,000. So pre-tax contributions at that point will be $10,500, and the match (applied to 6% of pay each payroll period) will be $6,300.

If the match is calculated at year end, then the employee would have contributed just over 6% (10,500/170,000). The matching contribution would be $10,200 ($170,000 times 6%).

Which is more common?

r.

[MR]

Hey, what kind of pension geek is on Benefitslink at 11:00 at night? Anyway, as a TPA with about 400 401(k) plans, I can tell you that the vast majority of my clients match at year-end for 2 reasons. One is the very scenario your outlined. Since the $170,000 guy is probably the one paying my fee, I always do what's in his best interest. The second reason is that it allows the employer to condition the match on year-end employment status.

That said, however, I will further tell you that the majority of the plans I takeover from bundled providers match on a payroll to payroll basis. The reason for this is that they cannot or will not do an annual match calculation, leaving the client with little alternative but to have their payroll company calculate it per payroll.

So far, I acknowledge that I have been of little help in answering your question. Since there are more plans administered by turn-key providers, I guess there are more plans that match on a payroll to payroll basis.

Lie to me and tell me I was helpful.

[Guest PAUL DUGAN]

I am not sure there is a norm or standard.

Our experience has been that larger plans use

by payroll while smaller plans use annual to

eliminate the problem you illistrated. We also

find that many dailey val providers are not setup

to ajust the match at end year so they require

that the by payroll method be used.

[card]

MR and Paul- thank you. VERY helpful. no lie.

r.

[Jon Chambers]

I agree with the comments above, but note that with the trend towards more bundled providers, payroll period matching seems to be becoming more common. In my experience, about 80% of plans match on a payroll period basis. Some plans using a TPA adopt a hybrid approach--pay period matches, with an annual "match patch"--an additional contribution, to provide participants with the maximum match under an annual formula. This is extremely popular with participants, who can front-load 401(k) contributions for investment purposes, without negatively impacting the match total for the year.

[Guest Meg H]

Jon, if you were going to administer the plan as you described (with the "match patch"), would you need to spell this out in the plan document?

[Jon Chambers]

I'm not directly responsible for the document or the "match patch" allocation, but I believe the formula DOES need to be in the document, b/c the populations for the payroll period match and the "match patch" are slightly different. The employer imposes a last day requirement for the "match patch" allocation, no last day requirement applies to the payroll period match. Don't thing that this is particularly hard to draft however, believe it fits in the TPA's master/prototype document, although it might be a volume submitter amendment.

[Jean]

Another reason for collecting the match on a per pay basis is to budget the cost of the contribution. Many employers are more receptive to a match if it can be paid over 12 months, rather then on lump sum at the end of the year.

Back to your original example, I believe the calculation of the match is the same regardless of the collection method. The deferral and match are a % of annual compensation, not partial year comp. Your employee employee earned 170,000, therefore his contribution should be determined based on that dollar and not the $105,000. You would need to collect the additional match. Also, if this is employee will always earn this much comp, he should consider making a per pay contribution of 6.1% and then there would be no need to make the additional year end contribution.

[Jon Chambers]

Actually, the calculation of the match depends on the accrual date, which is a function of the plan document. If the match accrues on the payroll date, the match is calculated on period by period comp, so, in the example provided, the employee gets less match unless they change their contribution behavior or the employer drafts the plan to incorporate a year end adjustment.

In my experience, companies tend to prefer year-end matches because they acknowledge the time value of money--if they hold funds during the year, it reduces their cost of borrowing, or, alternately, generates interest income. Of course, employees prefer pay period matches for the exact same reason. Some small, unsophisticated employers might appreciate the installment nature of a pay period match, but larger corporations won't have difficulty funding the match, and would rather pay later than sooner. For them, it becomes a benefits decision--keep employees happy by funding each pay period, or reduce corporate finance costs by funding at the end of the year.

[Guest Tim Howard]

By requiring the "match patch" discussed above be contingent on last day requirement, does this produce a potential 410(B) coverage test problem?

In any event, I want to stress that the methodology for determining the match likely is found in the document, usually as part of the definition of compensation. If the plan defines the match as a percentage of Compensation, which is further defined as annual compensation, then a match adjustment would be required at year end, not just "optional"

I would agree that most daily valued plans use a per-pay-period match and that "traditional" plans are more likely to match at year end.

[Jon Chambers]

I don't believe that the coverage issue for a "match patch "is any more complex than coverage for a year end profit sharing contribution with a last day requirement. Clearly the patch is a separate "BRF" which needs to meet coverage. If turnover is really high, this could be a problem. Presumably, a year end only match with a last day requirement would face similar problems.

I agree with Tim's comment about the plan document governing. I wonder if there are some (many?) bundled plans with a document that defines a matching allocation based on annual comp that operationally use a pay period approach. I can see how this would be a potentially huge compliance problem.

[Guest jgroves]

Don't forget to check any bargaining agreements (if applicable) as they may spell how the match is distributed already.

[Guest Ben S]

I am in ageement with many points above. My experience is, however, that the better documents deal directly with this "True-up" or match-patch" Those that dont have to be interpreted one way or the other. Some do and some dont. I think that any daily provider worth their salt needs to be geared up to handle this allocation. Generally (in my experience) it is the client who is doing the calculation of this and sending data to the TPA, but TPA's also should provide this to the client if called for. A compromise approach (so that they are not overmatching anyone) could be to have the client hold the last couple months match until January when you can assist with the YTD calculation.

Hope my 2 cents also helps.

Ben Sliwka

Compliance Mgr.

Burke Group, LLC

[Guest John Nelson]

Having a last day of plan year employment requirement for the company matching contribution sounds interesting, but won't such a condition make meeting 401(m) nondiscrimination difficult, since most turnover takes place among non-HCEs?

[Alf]

Also, to carry Jonh's point further, if you have a LDY requirement for the true-up, you will end up with different rates of match for different employees. Each different rate of match will be a benefit, right, or feature that has to be tested under 401(a)(4). Won't this effectively preclude the use of a LDY requirement for the true-up unless you really know your demographics.

[MWeddell]

If an employee satisfies the eligibility conditions for being eligible to receive a 401(m) contribution but doesn't receive that particular year's contribution due to the last day of the plan year condition, this is treated as a 401(a)(4) issue, not a 410(B) issue. See Treas. Reg. 1.401(a)(4)-2(B)(4)(iii). Because there's not a similar provision in 1.401(a)(4)-4 means that one would have to do perform benefits, rights, and features testing on the match's availability without ignoring the last day of the plan year condition. However, if this is the only thing going on with the match, using a snapshot population testing method even with the appropriate adjustment suggested by the data substantiation rules of Rev. Proc. 92-34 should make this test pass easily. The threshold for passing the BRF test is not the 70% ratio percentage threshold but the much lower figure from the nondiscriminatory classification test. I didn't mean to get too technical but wanted to suggest a resolution to some of the testing concerns.

I agree that although as a consultant I generally prefer the year-to-date method or a year-end true-up matching contribution, matching per payroll period is still more common. I don't know of a survey addressing this issue.

I agree that many, probably most, plan documents are silent about what period is used to calculate the match but that to meet the definite allocation formula requirement, the document should address the issue.

Note that there is always a certain arbitrariness when choosing what period is used to measure fairness. For example, take two hypothetical employees both earning the same amount during 1999-2000 with no bonuses, no raises, etc. Assume they participate in a calendar plan year that matches the first 6% of pay. Both A and B contribute 12% except A takes a hardship withdrawal with 12 month suspension on 7/1/1999 and B takes a hardship withdrawal with 12 month suspension on 1/1/2000. Both employees resume contributing at 12% immediately after the 12-month suspensions end. There is no policy reason to give B half of the match compared to what A receives, but that's what happens with a plan year match calculation compared to matching each payroll period. Hence, a plan year match calculation might seem fairer and handles better the interaction with the 402(g) limit on elective deferrals, but it's not perfect.

[John A]

While the following issues may not be directly on point, I believe they are at least reasonably related to the topic.

1)In situations where the match has been made on a payroll by payroll basis and there has been a last day requirement for the match, I have heard that recent court cases have awarded the match to employees who terminated during the year and did not meet the last day requirement, especially if the match showed up on a voice response system or benefit statement without a warning of possible forfeiture. Has anyone else heard that or does anyone know of applicable cases? It seems ridiculous to me to match on a payroll basis if there is a last day requirement, but it seems to have been done. How have others handled this issue?

2) If the match is discretionary, does it have to be stated in writing prior to the beginning of the year? If a different match is stated in writing each year, is each one an amendment to the plan? For example, if in Year 1 the plan sponsor declares the discretionary match will be 100% of deferrals up to 6% of compensation on an annual basis, and in Year 2 the plan sponsor declares the discretionary match will be 50% of deferrals up to 4% of compensation on a payroll by payroll basis, is this acceptable? Is either declaration a plan amendment? Does the declaration have to be in writing and prior to the beginning of the plan year?

3. Is it ever acceptable for a plan sponsor to declare the discretionary match during the plan year or after the end of the plan year? If so, how is it meeting the definitely determinable allocation formula rules?

[Jon Chambers]

With regard to John A's three questions, here is some real world experience.

1) I agree that it is ridiculous to match on a pay period basis if there is a last day requirement. In addition to the obvious apparent cut-back issues, there are very real problems with the plan holding unallocated funds at the point in time that the funded but unaccrued match is pulled back out of the accounts of participants that terminate before year end. I've never seen a plan that operated in this manner.

2) I don't believe that in a discretionary matching environment that the formula needs to be stated before the start of the year. I have at least one client that has a discretionary matching formula that permits them to adjust the form and amount of the match annually, without the revision reflecting a plan amendment. The plan document incorporates several formulas, all discretionary, and the Board elects which formula will be funded, in what amount. Although some may believe that this approach is not "definitely determinable", the plan has a FDL.

3) See answer to (2), above.

Hope this helps. Remember, I'm a consultant, not an attorney.

[Jean]

I believe that the plan doc used is a function of employer size. We deal with small employers. The plan doc is a standardized / prototype plan which requires contributions to be allocated on annual comp. The operational decision to collect the match electronically each pay period is for administrative ease of payment, reduce processing of checks, and to reduce the volume of year end contributions. Not to mention that the contribution is invested much earlier than a year end payment. It does require a year end calculation to ensure the proper match was received.

Another match example for everyone is a plan with a discretionary match feature. During the year, the employer issues an internal memo stating a match would be made, and the percentage amount. It did not specify that is would be made for that plan year only. Upon plan audit, it was viewed to be a plan amendment from a discretionary to a required match. An additional match contribution was to be paid for every year after the memo was issued. Resulted in 3 years of missed contributions. YIKES!

[card]

Thanks for everyone's comments. The reason this came up was because of an employer's desire to have a "make-up" match in its NQDCP. But that will be a new thread: What's the most common way to provide a make-up match in a NQDCP?...

r.

[Guest ewmc]

As noted above, several of us have seen match as you go (payroll period)and year end match. If you match as you go, you may sure up the match at year end. If you have a good daily val system, you may elect the option to calculate the match based on total compensation and the system will provide you with the additional matching contribution required at year end.

[wmyer]

In terms of the original question, check out http://www.psca.org/43rd.html. The PSCA surveyed 806 profit-sharing and 401k plans and determined that matching contributions are most frequently on a PAYROLL PERIOD basis. Also the most common type of fixed match is 50% up to the first 6%.