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The problems with the 401(k) Match Game

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If you’re an employee and your employer matches your salary deferrals through a matching contribution, that’s great. However, from a compliance end, matching provisions can be an actual headache.

One of the biggest problems with matching is when an employer will actually match the contribution. A matching formula that is funded at the end of the year is a lot easier than one that is funded each payroll period. Why? Plan participants have the ability to fluctuate their deferrals throughout the year and if they defer enough that they hit the annual limit, they may go 1-2 months without making a deferral. So when you match every payroll or your formula is tied to payroll, your record keeper needs to ensure that the matching contribution is correct as deferrals fluctuate. That’s why I like an annual formula and annual funding, it just a lot less messy.

It even gets messier when the plan sponsors funds the matching inconsistently with the formula such as making an annual match contribution when the formula looks at payroll period deferrals and compensation or vice Versace. This sometimes requires a corrective contribution so that the contribution is consistent with the formula.

Another huge problem is what I call the stated match formula where the plan document or summary plan description states exactly what the formula will be. My problem by stating in these plan documents is that it takes a discretionary contribution and makes it mandatory. That’s a big problem in times when the employer maybe struggling and can’t afford a match and now the plan documents may have tied the plan sponsor’s arms into making the match stated in the plan document. I like a discretionary provision for matching, but the problem with that is that so few plan sponsors draft any type of corporate resolution to announce a matching contribution. Surprisingly, I’ve had IRS agents with issues about that. So if an employer is going to make a match, there should be some sort of directive that they’re making it.

Matching contributions are a great feature for a 401(k) plan, but they can be a headache for some of us in compliance.

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