How to Talk to Your Advisor about Financial Wellness
401k plan sponsors with a December 31 year-end date soon will be receiving their administrative plan testing results from Third Party Administrators. For employers who match participant deferrals throughout the year, TPAs will look to see that company matching contributions did not exceed promised levels. TPAs also will determine if sponsors may make true-up company contributions to participants whose total deferrals made them eligible to receive a higher match than they received due to the timing of their deferrals.
Some employers match participants’ deferrals after the end of the plan year, while others match those deferrals throughout the year. When matches are made each payroll, over and under contributions can result.
An excessive employer match is a compliance issue. Should this occur, the sponsor generally must remove any excessive contribution (adjusted for investment gains and losses). The sponsor should act as soon as the discrepancy is identified to ensure plan compliance. Should a participant who received an over-match terminate and take a distribution of their 401k plan assets, the sponsor could be considered out of compliance.
Employers should consult with their TPA to determine what may be done with excessive contributions after they are removed from participants’ accounts. Depending upon a plan’s design, these funds may be able to be deposited to a forfeiture account and used to offset future employer contributions or plan fees. It may also be possible to distribute those funds to all participants through a same-plan-year additional match or profit-sharing contribution.
When a participant is eligible for a full matching contribution but does not receive it, a true-up may be permitted by your plan at the employer’s discretion. A participant that doesn’t receive the full match can result when a participant chooses to defer at an inconsistent rate throughout the plan year. To explain, let’s take a plan that offers a dollar-for-dollar match to anyone who defers 4% of their salary. If a participant defers at an 8% rate for six months and 0% for the remainder of the year, he or she would receive less than a 4% match for the year because only 4% of each deferral would be eligible for matching. At the end of the year, it would be found that the six-month deferral of 8% resulted in a match that was equal to 2% of the participant’s total compensation.
Should the sponsor choose to make a true-up match, all participants who did not receive the full match for which they were eligible would have to receive the true-up contribution. The employer would need to make the contribution before filing the company’s tax return (including any filing extensions) to take the contribution as an expense in that year but would have until the end of the next plan year to make the true-up with the expense taken on the following year’s company tax return.
Matches, and any excessive match corrections or true-ups, depend on many factors as defined in each plan’s design. Employers should check with their Third Party Administrator to confirm their plan’s definition of compensation and the parameters surrounding the match. It’s also a good idea to check that all plan compensation is coded correctly on payroll files to ensure participant deferrals and matches are correctly calculated. Recordkeepers should also be consulted to learn what systems they have in place to help employers ensure all transactions are compliant.
It’s important to have a conversation with your plan’s TPA to help identify the possible actions and deadlines should excessive matches occur, as well as whether the plan allows for true-ups. Understanding the regulatory requirements and the options associated with matches in a 401(k) plan can help a sponsor better operate their plan to their organization’s benefit and the benefit of employees.
This blog is written to help makes the lives of plan sponsors easier in the process of meeting legal under ERISA and improving their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan and hence cannot be a guarantee against fiduciary brief.