Paycheck to Paycheck vs. Statutory Compensation method for calculating match

What are the benefits and drawbacks of using paycheck to paycheck for company match vs statutory compensation? We are taking a rollover plan that is paycheck to paycheck but are not sure if it would be best to keep it this way or change to statutory compensation. We believe statutory compensation would be easier for true up purposes but paycheck to paycheck could be easier for record-keeping. 

My remarks are colored by the fact that we (a TPA firm) work in the micro plan market. My worldview is that other people - the plan sponsor, the payroll company - are going to screw things up.

If you do calcs each payroll (and I am assuming the plan says this - you can have annual calcs but still make estimated deposits each payroll) you are relying on someone else to make the calcs (I hope the TPA isn't expected to do that). That's "easier" for us in theory, but prone to mistakes (that no one will ever know about, but I digress). It can also lead to unhappiness for those folks who front-load their contributions.

Using annual comp is what we're used to and prefer. If someone asks how their match is calc'd, it's easy to show how it is done. If it is done by payroll you just shrug. If matches are deposited each payroll but the plan calc is annual, then yes you have true-ups. That seems fairest to me but may not be convenient.

In the large plan market, and I guess some small plans, the idea is to more-or-less pay people out the minute they walk out the door, and the only way to do that is to do the calcs on a payroll basis.

From a participant perspective, one advantage to a pay period deposit is the benefit of dollar cost averaging. The best possible scenario for a participant is a document written with an annual match but the contribution is funded per pay period (so you get both a true up and dollar cost averaging). A plan administrator may feel that an annual match funded once per year is better due to the reason's Bird provided (to which I agree). 

9 hours ago, WCC said:

The best possible scenario for a participant is a document written with an annual match, but the contribution is funded per pay period (so you get both a true up and dollar cost averaging).

TPA pricing structure might have some influence on the plan sponsor's choice.  Consider carefully.

My experience is that payday to payday works best if it is part of the automated payroll process. Say you have a match set at 50% of the first 6% of covered compensation. The calculation each payday would be: 

Step 1:  Year to date deferrals / year to date covered compensation = deferral percentage  (some also match 401(a) contributions, and "catch-up")

Step 2: Deferral percentage from Step 1 * .5 (up to 3%) * year to date covered compensation = employer match year to date

Step 3: Employer match year-to-date from Step 2 - actual employer match made year to date = amount of match to contribute this pay period.

Otherwise, if it is manual calculation or something done by the service provider/recordkeeper, I would wait until year end and perform a single calculation.  If you wait until the end of the plan year to match employee contributions, you should also consider whether or not to add a requirement of active employment on the last day of the plan year as a qualification to obtain the match, and of course vesting requirements. Different rules apply to safe harbor plans. See: https://www.nytimes.com/2014/02/15/your-money/beware-of-the-end-of-year-401-k-match.html for the controversy such a change might trigger. However, if your turnover is substantial ... 

Payday to payday ensures a separating employee who receives a distribution soon after separation, won't end up with a subsequent payment. Similarly, payday to payday allows you to communicate/market the feature mid-year (maybe even auto-enroll the worker, or auto-escalate where they are not contributing enough to obtain the full match) with a message that it is "not too late to join and receive maximum employer match for the year). 

See: https://www.psca.org/news/blog/true-catch-whats

And 

1907_Fall_2019_Ldrship_Ltr_Catch-Up_0.pdf

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