Annual Match Calculation Excluding Comp Prior to When they first contributed

Participant's entry date is April 1 2023.  They start contributing June 1st 2023.  Client wants to have a plan provision that excludes comp prior to the first date they made any contributions. In the words of  Kramer, my reaction was "You just blew my mind."

I think this should be allowable (aside from the fact that my pre-approved document does not include this option, which I guess is a different matter on reliance, etc).

Thoughts?

Grrrr, either go with a pay period calculation or don't, but stop trying to be cute?  😜

"Poise counts!!!"

I"m with Bri..... grrrr..... 

Safe harbor plan?

2 hours ago, austin3515 said:

Participant's entry date is April 1 2023.  They start contributing June 1st 2023.  Client wants to have a plan provision that excludes comp prior to the first date they made any contributions. In the words of  Kramer, my reaction was "You just blew my mind."

I think this should be allowable (aside from the fact that my pre-approved document does not include this option, which I guess is a different matter on reliance, etc).

Thoughts?

That would be a per payroll match, no?

**edited because I was wrong***

1) it is for a non-safe harbor match

2) the client wants an annual true-up but doesn;t feel like they should be obligated true-up for the portion of the year that participant was "too lazy" to fill out the forms.  I'm paraphrasing but that is the logic.

I am reminded of something I learned a long time ago which is clients want they want even if we don;t think they should want it 🤣  The question at hand is, is it legal.

And of course I cannot run ADP/ACP testing based on that definition of comp.  I would need comp as a participant based on the plan provisions to comply with 414s.

I agree with everyone else, their best path forward is a per payroll match.

If this happened in 2023 (and a calendar year plan), the client has to live with the plan provisions in effect in 2023.  If they want to try implement something in 2024, they should make sure no one loses a benefit that before the plan is amended.

If they want an annual true-up, or if the have a true-up by a plan default because they are funding less frequently than every payroll, the math very likely will wash out any perceived value to ignoring the comp.

If they don't go with a per payroll match and somehow did implement what they are asking for, then this likely will create variances in match rates.

There likely are more "gotchas" to this concept.

I can only imagine the client's reaction when they are faced with correcting a failure to implement or missed deferral opportunity.

Do you even dare telling this client how much more they will have to pay you to try to administer their idea?

Honestly I do not see this as being an administrative nightmare at all. Participant becomes eligible 4/1/2023, does not contrbiute. They sign up at 12% 7/1/2023, and the match is 50% of 6%.  The client doesn;t want to match their comp for the 3 months before they signed up.  This is not an irrational idea. The client wants a true-up calculation primarily for people who max out too early. 

This is all very insightful information but the one thing I have not yet seen addressed is whether or not it is permissible.  I can't think of a reason it would not be.  The amendment would need to be clear it impacts ONLY compensation paid prior to their initial enrollment, and not a start/stop scenario in later years.  This not challenging to administer either as the client clearly knows what pay-date they first contributed from.  Again this is not a safe harbor plan.

I've always preferred clients do an annual true up. If they are willing to do the match, what difference does it make when the participant does the deferral. Instead of maxing out early, maybe the participant is paying off some debt the first half of the year and then is able to defer. Why should the intent be to only benefit the ones maxing out early?

There are a number of reasons why a participant might change their deferral amount once or twice during the year.

Understood but the executive who maxes out in March 2023 gets a true-up of $8,00 (per my calculations for a client this morning).  So you'll have tough time convincing my clients that the true-up was not for the CEO but rather the other employees who got true-ups of around $50 to $300 max.

Well, yes, it gives HCEs more flexibility as well. I don't see that as a negative.

Consider the opposite situation, someone contributes 12% in the 1st 6 months and then stops the rest of the year. They would still get true up and seem to be at odds with the client's goal.

Having spoken to the client, I can assure the clients goal is to not owe any match during the period of time that elapses between their eligibility date and the date they first elected to make a contribution.  That's the full scope of their goal.