Rigid match not funded correctly

[Tom]

Plan sponsor wanted a plan that provided a 1% match to HCEs and a higher match to NHCEs.  The match is calculated each pay period with the plan sponsor setting the match in with their payroll service provider at the beginning of the year.  This provision is obviously problematic as employees might move from HCE back to NHCE and vice versa and from an HRA standpoint is not very employee-friendly.  I should add they have many well paid employees who however over and under the HCE threshold each year and are not owners.

So for 2025 we see a couple HCEs who received more match than they should have.  The match is discretionary but rigid and so the notice goes out.  Seems we would transfer the excess match along with earnings from the participant's account to the plan's unallocated cash account.  So there would e no distribution to the participant nor 1099-R.

Thank you,

Tom

[Tom]

HR standpoint - not HRA

[Peter Gulia]

If the employer has enough money:

Might the plan’s sponsor amend, with retroactive effect, the plan so all participants get for 2025 the same higher matching contribution—what had been provided only for nonhighly-compensated employees?

BenefitsLink mavens, would this be feasible or infeasible?

[CuseFan]

I think amendment after year-end to increase the match only for HCEs is problematic, even if it is to simply bring their percentage up to NHCE rate.

I think forfeiting amounts allocated in error along with attributable earnings is the proper correction. 

The design/practice is burdensome, but at the end of the year the payroll provider has sufficient information to identify the following year's HCEs and should be able to implement. Maybe if payroll is weekly the timing is tight, so why not have the employer make deposits monthly?

In addition to solving a current problem, put on your consulting hat and help them avoid its recurrence.

[Peter Gulia]

I was too hasty in setting up my question about whether a plan sponsor might amend a plan to increase a benefit.

A retroactive amendment doesn’t work for a matching contribution.

Internal Revenue Code of 1986 (26 U.S.C.) § 401(b)(3) provides

(3) Retroactive plan amendments that increase benefit accruals

If—

(A) an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))),

(B) such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and

(C) such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A),

the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective.

CuseFan, if a situation like what Tom describes were about a nonelective contribution, would a § 401(b)(3) amendment (assuming coverage, nondiscrimination, and other conditions for § 401(a) treatment are met) work? Or are there other reasons for a no-go or slow-go?

[CuseFan]

Non-elective, yes, but for nondiscrimination I think you have a problem if the amendment benefited only or primarily HCEs.