An advisor asked: “I read recently in a TPA’s annual letter that there is a new mandate to provide a written disclosure of the match formula in years where a plan makes a discretionary match. Can you provide some details?”
ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from California is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan.
Highlights of the Discussion
Sponsors of 401(k) plans that utilize pre-approved plan documents are facing an IRS-mandated, cyclical restatement process (“Cycle 3 Restatement”). Every six years, plan providers must update their 401(k) documents for recent law and regulatory changes and file them with the IRS for pre-approval (or re-approval). In turn, employers who use these documents must adopt an updated pre-approved plan, in this case, no later than July 31, 2022 (IRS Announcement 2020-07).
There are new requirements with this restatement for businesses that elect to apply a fully discretionary matching contribution formula (i.e., where the rate or period of the matching contribution is not pre-selected) in their pre-approved plans. With respect to these fully discretionary matching contributions, the IRS made it clear to document providers that their documents must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(i), which states a plan must provide a definite predetermined formula for allocating the contributions made to the plan. Consequently, any pre-approved document with discretionary matching contributions will have to include language that complies with the definitely determinable mandate, and adopting employers will have to
- Provide the plan administrator or trustee written instructions no later than the date on which the discretionary match is made to the plan describing
- How the discretionary match formula will be allocated to participants (e.g., a uniform percentage of elective deferrals or a flat dollar amount),
- The computation period(s) to which the discretionary matching formula applies; and, if applicable,
- A description of each business location or business classification subject to separate discretionary match formulas.
- Provide a summary of these instructions to plan participants who receive an allocation of the discretionary match no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.
The first year for which this communication is required is the plan year following the year the employer signs the restatement.
ABC, Inc., restates its calendar year 401(k) plan in 2021—even though it could wait until as late as July 31, 2022. Based on this timing, the communication is first due for the 2022 plan year. If ABC Inc., completes making the 2022 matching contribution April 1, 2023, then the deadline to provide the participant communication is May 30, 2023.
As part of a prudent governance process, plan sponsors should work with their pre-approved document providers and recordkeepers to review their procedures surrounding their plans’ matching contributions to ensure compliance with these new requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.
Pre-approved defined contribution plans are in a restatement cycle that must be completed by July 31, 2022. Employers that use a pre-approved plan and give a fully discretionary matching contribution must satisfy additional participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.