Taking Back Matching Contribution?

Let's say the company has a discretionary match provision chosen in the plan document. The company chooses to fund the matching contributions pay-date by pay-date. Let's say at the end of the year, the company decides that it actually does not want to fund the discretionary match. Can the company take away the matching contribution from the people who were funded?

Might depend on what they want to do with it but if it is coming out of the plan and going back to the employer I'd say absolutely not.  Saying "oops we changed our mind" is not a mistake in fact.

What would you say would be permissible use of the funds the company takes back? Can they use it to pay invoices or fund future contributions? 

Based on your post, I'm assuming these dollars have actually been allocated to participant accounts. Assume that a participant is 100% vested in his or her accrued benefit. In a defined contribution plan, the participant's accrued benefit at any point in time is her or her account balance. How could you possibly justify removing these amount from the participant's account?

1 hour ago, card said:

Based on your post, I'm assuming these dollars have actually been allocated to participant accounts. Assume that a participant is 100% vested in his or her accrued benefit. In a defined contribution plan, the participant's accrued benefit at any point in time is her or her account balance. How could you possibly justify removing these amount from the participant's account?

I'm not advocating for removing money in the situation described, but "deposited" is not necessarily "allocated."  If an employer was shooting for a 50% match and it turns out someone got 52% while someone else got 48%, I could see moving money from one participant to another (understanding the dollars may not match up perfectly).

If the employer has been depositing 50% as a discretionary match throughout the year, I don't think it has been allocated until they make some year-end declaration (or don't...they should have a resolution but often I think the action implies the declaration).  So in some theoretical sense, they could remove the money from the participant accounts but leave it in the plan.  I think it would have to be allocated as some sort of an employer contribution and not just shoved over to a forfeiture account and used, say, to pay fees.  But it's really ugly and I think I'd say "no you can't do it."

You definitely could NOT pay fees with it.  The "removed" match is not unvested, hence forfeited, funds. 

If anything, this could be considered an excess allocation and be treated according to the correction principals in EPCRS.

What a recordkeeping nightmare!  If the money has been deposited to participant accounts and a vested terminated participant is paid out, how do you get the money back?  Or worse yet, what if a HCE was able to take out the match due to some distributable event?

If this is daily value what do you do with the earnings? What if there is a loss? 

I think they need to stop doing this or suck it up and say what was deposited is going to be allocated. 

These are really difficult plan provisions to administer and have potential compliance issues if reviewed by DOL or IRS.  In pre-funded profit sharing accounts, if the profit sharing contribution is separately accounted, but still in the plan, the employer could remove the profit sharing contribution if there is no allocation to be made to support the money in the plan; however, earnings on the profit sharing should be allocated in the plan -- losses reduce the amount of money returned to the sponsor.

In a plan where the document provides a "yearend" match, pre-funding has several challenges.  First, the participants who have left the company and taken distribution of plan assets have received a benefit not available to other participants if the match is taken away.  Also, if removing the match only, the earning on the match would be a benefit that would need to be tested -- and there's a chance the earnings may be considered a contribution by the IRS.  Each participant may need to have individual earnings calculated to correct a match, and the pre-funding to actual participant accounts may need to meet the stringent "mistake of fact" definition.

Pre-funding can be difficult even where the match is not rescinded as the benefit may inadvertently benefit HCE's, so it may be best to not fund to a participant's separate account until a benefit under the plan is actually earned.  In plans that have applied this action with the least administrative hassle, they have kept the "pending" match in a separately managed source (i.e., 401k, Roth, Match, Profit Sharing, and "pending" match separate accounts), and with distributions provisions where the account -- or, at least the "pending match" source -- are not distributable until after the end of the plan year in which termination has occurred.

I realize this is "after the fact" advice, but if this match is in participant accounts and statements have been issued, benefits paid, etc., I would tell the client that it cannot be removed.  That, in my opinion is not what "discretionary" means.  If I am drafting the document, I require the client to align payroll matching with an annual decision for the following year and a true, "we don't know what we are doing yet" match with a year end deposit and allocation.   

All it would take is for one disgruntled participant to take a "before and after" set of statements from the removed/discretionary example to the DOL and the resulting difficulties would make this discussion seem benign.