Stopping Discretionary Employer Match Mid-Year

[DP]

We have a client who has a 401k plan which runs 6/1 - 5/31. The plan document calls for a discretionary match. Historically each month the employer puts in a 50% match up to 6% of deferrals. The participants receive quarterly statements showing the match allocation. The employer also prepared a simple participant handout outlining the plan which states the match will be 50% up to 6% of deferrals.

The client now has a cash flow problem and wants to discontinue the match. Since the document says the match is discretionary, can he stop the match retroactive back to 9/1/00? The last participant statements prepared were dated 8/31/00. Or should the client give the participants a notice saying the match will be stopped as of 1/1/01? The client has already deposited match money into the plan for September, October, and November. Could this be used as part of the Top Heavy contribution due for 5/31/01?

[Erik Read]

Aside from moral issues with the ee's I don't see a problem with stopping the deposits. If the document specifies that the match is descretionary, then it is not required. However, the notice may be construed as a "board res" stating the match for the current plan year, and at the end of the year, the sponsor may need to make the contribution to the account. There's nothing in what you give us as facts to say the match needs to be deposited monthly either - so he can stop that, and make a single deposit by tax deadline for corporation and still get the deduction, or alternativly - the corp has 12 months after plan year end to fund the match.

Good Luck.

[david rigby]

Another point is the allocation. Even if you deposit the match, it does not have to show up on EE statements until allocated. BTW, the plan probably already tells you when that should be. By showing a match allocated, you might actually be violating the plan.

[KJohnson]

I got into this argument with counsel for the sponsor of a prototype plan. They sent me the following where they were advised that changing a discretionary match mid-year is actually not a 411(d)(6) or 401(a)(4) rights and features problem but a 1.401-1(B)(1)(ii) problem. I am not sure I agree, but here is what they sent:

Two IRS agents from the Cincinnati Key District Office verified that a "discretionary" match CANNOT be changed during the plan year. The reason is because changing a discretionary match violates Treasury Regulation 1.401-1(B)(1)(ii) that states a profit sharing plan must provide a definite "predetermined" formula for allocating the contributions made to the plan. Thus, a "discretionary" match must be the same percentage for the WHOLE plan year.

They made it very clear that if the employer intends to change his matching percentage during a plan year, the matching formulas MUST be stated in the plan and the plan amended each time the formula is changed