401(k) true-up -- include pre-participation compensation?

This is for my own personal situation. My wife took a new job this year. The 401(k) plan does not exclude pre-participation compensation from the definition of compensation, and it has a year-end true-up (and a 30-day wait before participation).

By my reading, that means she should have been eligible for match on her whole year's compensation, including before she was eligible for the plan, not just her compensation while a participant. Does that sound right? Or does a plan document not need to exclude pre-participation compensation; it's just assumed by default that pre-participation comp isn't eligible unless otherwise stated?

Note that the plan only matches on the first 6% of deferrals, but she deferred 8% each period after she became eligible. That unmatched extra 2% could've been counted toward her her pre-part comp if pre-part comp is eligible. In other words, if you look at her whole year's comp and her whole year's deferral as a percentage of that comp, you get a bigger total match than you do when just looking at the period after participation.

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401(k) provisions (these come from the full plan document, not the SPD which is pretty silent on most this stuff):

- Provides a Match: "ACA Safe Harbor Matching Contribution to each Participant equal to 100% of the first 4% of the Participant’s Elective Deferrals plus 50% of the next 2% of the Participant’s Elective Deferrals to the extent that such Elective Deferral amount does not exceed 5% of the Participant’s Compensation."

- Matching is done by payroll period 

- Has a True-up: "in an amount equal to difference between the Employer Matching Contributions actually made during the Plan Year and the Employer Matching Contributions that
would have been made during the Plan Year if the Employer Matching Contributions were made on an annualized basis and not on a payroll-by-payroll basis."

- Compensation:

  "(a) Unless otherwise specified, the term Compensation means Form W-2 Compensation, and includes (i) elective deferrals under a salary reduction agreement authorized in Section 3.2(b) or under any plan described in Sections 401(k), 408(k) and 457 of the Code sponsored by the Employer; and (ii) salary reduction contributions to a cafeteria plan described in Section 125 of the Code and sponsored by the Employer. 

  (b) Unless otherwise specified, the term Compensation excludes:

   (i) differential wage payments paid while on active military duty;  
   (ii) post-severance compensation (any compensation paid after the last day of employment); and
   (iii)  the following Code Section 415(h) safe harbor exclusions: [fringe, expenses, relo, welfare pmts]"

- Participation: "Eligibility for participation shall commence on the Entry Date coincident with or immediately following the Eligible Employee’s completion of the Eligibility Requirements"

-Eligibility Requirements: "[E]ach Eligible Employee who is not a Participant as of the Effective Date shall be eligible to become a Participant on the first Entry Date coincident with or  immediately following his or her completion of one month of Service and attainment of age 21."

- Entry Date: "shall mean the first day of each calendar month, unless otherwise specified in Appendix B."

Note that despite being capitalized in the plan document (see the excerpt on Compensation above), "W-2 Compensation" is not a defined term in the plan doc.

[I also think there's a typo in the Match definition. The last reference to Elective Deferral -- "to the extent that such Elective Deferral does not exceed 5% of the Participant's Compensation" -- should be to "ACA Safe Harbor Matching Contribution.

Not a typo. The match in your example is capped at 5%. The match is based on her deferrals, and done each payroll, so if she was hired on 1/1/2022 and was eligible to defer on 2/1/2022 then her match starts on 2/1/2022.  You can't give a matching contribution to someone who is not deferring. If they do a true up she may get more. If her compensation is $50,000 and she deferred $4,000 then her total match would be capped at 5% of deferrals-$2,500.  So they would true up the difference between that and what she actually received. She should talk to her company if she needs clarification. 

18 minutes ago, Riley Britton said:

then her total match would be capped at 5% of deferrals

No.  5% of compensation, not deferrals. Otherwise in your example of $4,000 in deferrals, the match would only be $200 (5% of $4,000).

True-ups are simple.  You calculate the match under the formula on an annual basis (ie, you treat the year as one big payroll).  Since the plan does not exclude pre-participation compensation, you use full year pay.  Divide deferrals by comp then apply the match formula.  Then look at how much match was deposited and make up the difference.

I'm having trouble with the wording on the match:

12 hours ago, Sum_Guy said:

equal to 100% of the first 4% of the Participant’s Elective Deferrals plus 50% of the next 2% of the Participant’s Elective Deferrals to the extent that such Elective Deferral amount does not exceed 5% of the Participant’s Compensation.

it matches 100% of first 4% of pay and then half of the next 2%.  To me, that goes up to 6%.  But it seems to be saying the deferrals are capped at 5% for match purposes.

I'm guessing it is supposed to mean that the MATCH is capped at 5% of pay (4 + 1/2 + 1/2 = 5), but it says the "Elective Deferral amount does not exceed 5%..."

I find it a bit unusual that the plan says matching is done each payroll period AND there is a true up.  It's somewhat contradictory but ultimately the payroll period deposits are essentially estimates.

From what I see, she should get the match based on her full year's comp.  If there were an exclusion for pre-participation comp it would typically be in the exlusions section that you quoted.

I wonder where you got this:  "Note that the plan only matches on the first 6% of deferrals."  I don't see any supporting evidence for 6%. (Edit: never mind; I see.  As BG50150 notes, something is a bit off.)

13 hours ago, Sum_Guy said:

Matching is done by payroll period 

Is this an actual quote from the document?  or is it a paraphrase.

And where did your wife the the full plan document?  Did HR give it to her?  usually, participants only get the SPD.

1 hour ago, BG5150 said:

No.  5% of compensation, not deferrals. Otherwise in your example of $4,000 in deferrals, the match would only be $200 (5% of $4,000).

True-ups are simple.  You calculate the match under the formula on an annual basis (ie, you treat the year as one big payroll).  Since the plan does not exclude pre-participation compensation, you use full year pay.  Divide deferrals by comp then apply the match formula.  Then look at how much match was deposited and make up the difference.

I'm having trouble with the wording on the match:

it matches 100% of first 4% of pay and then half of the next 2%.  To me, that goes up to 6%.  But it seems to be saying the deferrals are capped at 5% for match purposes.

I'm guessing it is supposed to mean that the MATCH is capped at 5% of pay (4 + 1/2 + 1/2 = 5), but it says the "Elective Deferral amount does not exceed 5%..."

That's what I meant...

5 hours ago, BG5150 said:

I'm guessing it is supposed to mean that the MATCH is capped at 5% of pay (4 + 1/2 + 1/2 = 5), but it says the "Elective Deferral amount does not exceed 5%..."

Agree (and that's what I was trying to get at in my last comment in italics in my OP). To write that thought in a lot more words:

It currently says: "ACA Safe Harbor Matching Contribution to each Participant equal to 100% of the first 4% of the Participant’s Elective Deferrals plus 50% of the next 2% of the Participant’s Elective Deferrals to the extent that such Elective Deferral amount does not exceed 5% of the Participant’s Compensation."

I think it should say: ""ACA Safe Harbor Matching Contribution to each Participant equal to 100% of the first 4% of the Participant’s Elective Deferrals plus 50% of the next 2% of the Participant’s Elective Deferrals to the extent that such ACA Safe Harbor Matching Contribution amount does not exceed 5% of the Participant’s Compensation."

Of course, my revised version has a redundancy: Since 4%*100% + 2%*50% = 5%, the first sentence alone is enough to limit the match to 5%. So in my edit, the second sentence isn't actually necessary. But as currently written it has two statements in conflict: how do you match on 4% and then the next 2% if you can only match on 5%? So I'm pretty sure they meant to be redundant rather than to write two statements in outright conflict (and FWIW, they are in practice matching 100% on 4% and 50% on next 2%, for 5% total, so their plan administrators read it the way I think it was meant to be written.)

None of this matters to me because they're administering it as intended, but I might point it out to them.

5 hours ago, Bird said:

I find it a bit unusual that the plan says matching is done each payroll period AND there is a true up.  It's somewhat contradictory but ultimately the payroll period deposits are essentially estimates.

From what I see, she should get the match based on her full year's comp.  If there were an exclusion for pre-participation comp it would typically be in the exlusions section that you quoted.

I wonder where you got this:  "Note that the plan only matches on the first 6% of deferrals."  I don't see any supporting evidence for 6%. (Edit: never mind; I see.  As BG50150 notes, something is a bit off.)

That's weird that it's unusual to you. Every plan I've ever seen that does a true-up does it specifically because of its by-payroll-period match. Matching by payroll period means that people can get "under-matched" if they vary their deferrals throughout the year. An especially common case is people who get hit by $19.5k deferral limit and have to turn off deferrals. So e.g. someone who likes to front-load and is deferring 20% of comp might the $19.5k limit at, say, just six months into the year, and then can't defer for the rest of the year. The by-payroll-period match would've only considered the first 6% of that 20% of deferral during the first 6 months, and then of course there's no deferral (so no match) for the rest of the year. Thus if you look at them for the whole year in total, they only got matched on 3% of their comp (6% for half a year, then nothing). Since that person actually deferred 10% of their comp (20% for first half of the year, then nothing), the true-up swoops in and keeps them whole on the match they would've missed -- match them on the full 6% of comp rather than than 3%

Having the true up in there a much nicer plan provision than forcing people to make sure they have enough deferral space left through the end of the year. With no true-up, it's actually pretty tough in some cases to both defer all the way up to the limit AND not miss out on at least a little bit of match, especially if there's even a little variability in their comp.

5 hours ago, BG5150 said:

Is this an actual quote from the document?  or is it a paraphrase.

And where did your wife the the full plan document?  Did HR give it to her?  usually, participants only get the SPD.

It's my paraphrase, but I think it's accurate. Here's the full quote from the plan doc:
 

Quote

 

(b) Timing.  The Matching Contributions by the Employer in respect of such Employee’s Before-Tax Contributions and Roth Contributions for a Plan Year shall be credited to the Matching Contribution Account of the Employee  as soon as practicable after the end of each payroll period. 

 

And for completeness, here's the full paragraph on True-Ups:
 

Quote

(c) True-Up Contributions.  To the extent necessary, the Employer shall make a “true-up” contribution (to be treated as an Employer Matching Contribution) to Participants,
including Participants eligible for Matching Contributions as described in this Section 5.2 and Participants whose matching contributions are designated in Appendix B to this Plan. Such “true-up” contribution shall be in an amount equal to difference between the Employer Matching Contributions actually made during the Plan Year and the Employer Matching Contributions that would have been made during the Plan Year if the Employer Matching Contributions were made on an annualized basis and not on a payroll-by-payroll basis. No “true up” contributions shall be made in an amount that cause the Participant to exceed the limits on Employer Matching Contributions specified in the above Section 5.2(a). “True-up” contributions shall be made as soon as practicable following the end of the Plan Year, but no later than the latest date permitted by law for the contributions to be treated as tax deductible for such Plan Year. Participants are not required to be employed on the last day of the Plan Year to receive a “true-up” contribution with respect to any ACA Safe Harbor Matching Contributions.

And to your other question, yeah she reached out to HR to get the full plan document. It was actually for an unrelated purpose: we were fighting with old employer and new employer over who would refund excess deferrals from last year, and it got to the point where I needed the plan documents so I could confirm how it worked. I really only needed the one from old employer, since we wanted the refund from them because they give no match, but I asked for the plan doc from new employer too just for completeness. (After a dozen emails with old employer and after they consulted their ERISA attorney, they finally came around; we just got the excess refund check from them yesterday.)

Funny enough, I wouldn't have even caught this problem with new employer's match (I'm not in the habit of reading plan documents for fun) if new employer hadn't been so gall-danged weird in how they applied 401(a)(17) comp limit this year (and also if I hadn't gotten the plan doc for purposes of that excess refund issue). What happened was that new employer stopped matching my wife's deferrals completely in, like, October. When we asked them, they said it was because her comp had gone over the $290k pay limit for the year. But I knew there was no way that her comp since she became a participant was over the limit -- in fact the only way to get her over the limit for the year was if you included all her regular comp plus the nice signing bonus they gave her. They assured us that those missed matches would be made up in the true-up in March (and the true-up did in fact make them up), but it was still weird as hell to me to not track her comp against the limit solely based on benefits-bearing (i.e. post-participation) compensation. So I pulled up the plan document, expecting it to exclude special bonuses from definition of plan comp (it doesn't) and also of course expecting it to limit plan comp to only that earned in her time as a participant (it doesn't, as far as I can tell). 

So the true-up they gave her wasn't enough. She had deferred over 6% of her post-participation pay, but they only trued her up on 6% of post-participation pay. If they look at full-year pay, she deferred less than 6% of that but the match on the 4.9% of pay up to the comp limit is better than match on 6% of post-participation pay. We're not talking huge dollars or anything, but I do like things to be right.

In case you're wondering, I was a retirement consultant (mostly DB/actuarial, but a decent amount of DC) with Mercer for 20 years, but a couple years ago I decided to chuck it all and do something completely different.

You don't mention an Adoption Agreement, but sometimes, if there is one, that document provides clarification.  Plan documents, if they are prototypes, contain all provisions that are allowed by law.  But the Adoption Agreement is the manner by which the employer would elect the provisions applicable to their specific plan.  Things such as the allocation time for match and whether a true-up is to be done are sometimes clarified by the selection in the Adoption Agreement.  

On 3/29/2022 at 8:52 AM, Bird said:

I find it a bit unusual that the plan says matching is done each payroll period AND there is a true up.  It's somewhat contradictory but ultimately the payroll period deposits are essentially estimates.

@Sum_GuyI agree in the context of a Safe Harbor Match, these are usually excluded from the true-up if determined on a payroll basis.  However, this is also noted as an "ACA" safe harbor match and I'm not clear if that makes a difference if it's eligible for EACA or QACA qualification. 

18 hours ago, CBPen said:

You don't mention an Adoption Agreement, but sometimes, if there is one, that document provides clarification.  Plan documents, if they are prototypes, contain all provisions that are allowed by law.  But the Adoption Agreement is the manner by which the employer would elect the provisions applicable to their specific plan.  Things such as the allocation time for match and whether a true-up is to be done are sometimes clarified by the selection in the Adoption Agreement.  

I would also check the account types definitions, the safe harbor match can sometimes be lumped in with the deferral account types; and seeing as the true-up provision denotes the Employer Match, this may refer to a discretionary match, or an additional discretionary match that is also safe harbor eligible.

"When we asked them, they said it was because her comp had gone over the $290k pay limit for the year."

Payroll systems are usually not able to track comp limits on anything but a gross basis. This is why payroll companies make crappy TPA's...(imo)