fund matching true up... plus lost earnings?

A 401k plan is written with a safe harbor match plan year calculation formula.  They fund the match per pay period and provide a true up after year end. 

They also fund lost earnings on the true up. I have never heard/seen this before. For example, if a participant is owed a true up, they fund it in September (for a calendar year end plan). They also calculate lost earnings from the last day of the plan year (12/31) to the date they fund the true up.

When asked why they fund lost earnings... "because this is the way we have always done it". They feel that since the match does not happen until September, they "owe" their employees the earnings. They feel that had the employee deferred evenly throughout the year, all their match would have been funded by 12/31.

Can lost earnings be funded on the true up? 

Thank you

Sure.  It counts as a 401(m) contribution.  Of course, it would need to be allowed by the document.

6 minutes ago, Mike Preston said:

It counts as a 401(m) contribution

Thanks - that's what worries me, it has always just been considered an "adjustment". Thank you for the reply. 

Generally, the plan document provides for the true up by changing that the contribution period for calculating the match to the "plan year", rather than the "payroll period". This provision changes the "contribution period" for the match, but it does not change the match formula. The match formula is still "$.50-on-the-$1 up to first 6%", or whatever. Seems to me that if you increase the match for lost earnings, you are no longer calculating the match contribution per the plan document match formula.

I would not go down this road.

Sounds like they've got an issue. If it's a safe harbor plan, does it provide for additional matching contributions at all (which the "earnings" would be)? If it does, it seems unlikely that the amount = what they are doing.

Any chance that they could treat the true-up as a correction of an operational error instead? Of course, they'd need to have an operational error to correct, but I guess that's my question.

It would seem any deviation from the stated document formula would require a non-discrimination review of amount or benefits, rights & features.  The plan document is required to contain language to allow a "year end" match true-up where match is calculated and otherwise funded each pay period.

Adding earnings would seem to be an additional contribution not supported by the document formula, and it may need to pass non-discrimination.  Because "true-up" has a tendency to favor participants who maximize contributions early in the year, it can favor HCE's who can afford to "max out" early. 

If in addition to a formula the plan document had a provision for a discretionary match, would probably be OK, as long as the discretionary does not have specific provisions regarding allocation that would conflict. As Mike Preston and perhaps others have pointed out, the "lost earnings" are really additional m contributions that have to be included in ACP testing.