By Jenny Kiffmeyer, J.D – The Retirement Learning Center
Special Notice Requirements for 401(k) Discretionary Matching Contributions
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 Minnesota is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan. The advisor asked: “Can you explain the special written disclosure rules that apply to certain 401(k) plans that use a discretionary matching contribution formula?”
Highlights of the Discussion
Sponsors using pre-approved plan documents for their 401(k) plans that apply a discretionary matching contribution formula must satisfy special notice requirements in years a match is provided. This requirement came about as a result of the Cycle 3 Restatement in 2022.
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, the IRS has made it clear that such plans still must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(I). According to the regulation, 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 have 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.
ABC Inc., has a calendar year, pre-approved 401(k) plan with a completely discretionary matching formula. For the 2023 plan year, ABC has decided to make a fully discretionary matching contribution on April 1, 2024. In this case, if ABC carries through with its intended matching contribution, the deadline to notify the plan administrator is April 1, 2024, and then the deadline to provide the participant communication is May 30, 2024.
Note that these requirements do not apply to pre-approved 403(b) plans as they are subject to a separate pre-approval process (Cycle 2) (See Q&A 11 of Q&As for 2nd Cycle Preapproved 403(b) Plan Providers).
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 requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.
Employers that use a pre-approved 401(k) plan and give discretionary matching contributions must satisfy additional administrator and participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.