Flexible discretionary matches and new documents

Now that new pre-approved 403(b) documents have been submitted to the IRS for new Cycle (or maybe Sickle?) does anyone have contacts at the IRS as to how the discretionary matches might work? With the Cycle 3 401(k), they allowed the "flexible discretionary match" provision due to the late decision that previously "normal" flexibility shouldn't be allowed, but word on the street was that they would NOT permit this approach on the 403(b) plans.

I don't know about the rest of you, but some of our non-profits have some of the most ridiculously complicated flexible match scenarios, which likely won't be allowed. Anyone have IRS contacts/feedback, at this early stage, as to what parameters might be imposed on match formula provisions? Never too early to start preparing them that they might have to think about other possibilities...

Thanks.

Even if the Service does not reconsider the interpretation about discretionary matching contributions, the Service should allow no less flexibility for plans with § 403(b) arrangements than for plans with § 401(k) arrangements.

Further, publishers of IRS-preapproved documents might present to the Service reasoned arguments about how charities—with no business owners, and often fewer opportunities for highly-compensated employees to tilt contributions in their favor—ought to get more flexibility.

Yet, I know no “word on the street” about what the Service might allow or forbid.

FYI, from the IRS in the context of Cycle 2 403(b) plan submissions, if this is what you are looking for.

Source: Q&As for 2nd Cycle Preapproved 403(b) Plan Providers | Internal Revenue Service (irs.gov)

Q11: Are you taking the same positions relating to discretionary matching contributions and definitely determinable benefits as you took with the Cycle 3 DC plans?

A11: The basis for our position on discretionary matching contributions contained in a Cycle 3 Section 401(a) defined contribution plan can be found in Treasury Regulation 1.401-1(b)(1)(ii). This regulation states that a 401(a) profit-sharing plan must provide a definite predetermined formula for allocating contributions made to the plan.

Our application of the written defined contribution plan requirement (Treas. Reg. 1.403(b)-3(b)(3)) to the 403(b) Pre-approved Plans Program for Cycle 2 expects any allocation formula for an employer matching contribution to satisfy the concept of a definite predetermined formula. We will not permit the plan language for a discretionary matching contribution formula which represented a compromise on this issue in June of 2020 between the IRS and the practitioner community for the Cycle 3 401(a) defined contribution plans program.

We will no longer accept the following compromise language: If a discretionary Matching Contribution formula applies (i.e., a formula that provides an Employer with discretion regarding how to allocate a Matching Contribution to Participants) and the Employer makes a discretionary Matching Contribution to the Plan, the Employer must provide the Plan Administrator (or Trustee, if applicable), written instructions describing (1) how the discretionary Matching Contribution formula will be allocated to Participants (e.g., a uniform percentage of Elective Deferrals or a flat dollar amount), (2) the computation period(s) to which the discretionary Matching Contribution formula applies, and (3) if applicable, a description of each business location or business classification subject to separate discretionary Matching Contribution allocation formulas.  Such instructions must be provided no later than the date on which the discretionary Matching Contribution is made to the Plan. A summary of these instructions must be communicated to Participants who receive discretionary Matching Contributions. The summary must be communicated to Participants no later than 60 days following the date on which the last discretionary Matching Contribution is made to the Plan.

For a discretionary matching contribution formula to satisfy the definite predetermined requirement, the following aspects must be addressed in the plan document:

• The matching computation period, such as payroll period or plan year, must be identified; this will eliminate ambiguity over the need for a true-up.
• There must be a note regarding the possible need for a true-up at year end where the employer contributes more often than the computation period
• There must be a definite allocation formula for the discretionary match, such as “a discretionary match shall be allocated to each participant as a uniform rate, for example 100%, of deferrals up to a uniform deferral percentage

The employer can have discretion over the matching contribution amount, the rate at which deferrals are matched, and any limit on the deferrals that are matched. The rate and limit are both factors in the determination of the amount of the contribution. The above sample discretionary matching contribution allocation formula retains this discretion but allows someone to know how it will be allocated.

Thanks!