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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Restoring Your 401(K) Plan’s Match? – Employer Contributions are Rebounding, But Move With Caution

Posted in U.S. Pensions & Benefits Law

In August of 2010, Investment News ran the headline: “Employers Slow to Restore 401(k) Matching Contributions.” What a difference a few months can make! On February 23, 2011, Reuters reported that according to Fidelity Investments, 55% of plan sponsors who reduced or eliminated their matching contributions in the recession had either restored them or plan to do so this year. The percentage rises to 71% for large companies. Confirming that employer contributions are on the rebound, a similar report by the Profit Sharing Council of America reported that 39.3% of surveyed employers who had suspended contributions have restored them and an additional 37.8% plan to do so within the next 6 months.

We clearly see a trend, but just as U.S. rules dictate how to suspend contributions, technical qualification requirements need to be satisfied when contributions are restored. Following the rules now can avoid future audit problems or the need to file under a voluntary correction program.

Tips for Avoiding Problems When Restoring an Employer Match

  1. If you resume a matching contribution mid-year, you will have to do discrimination testing of both employee and matching contributions for the current plan year. If you suspended contributions under a safe harbor 401(k) plan, you can’t resume a safe harbor matching contribution midyear. You can resume safe harbor status by sending out a new safe harbor notice before the next plan year starts.
  2. If you are unsure about the level of match you can ultimately pay, you could adopt a discretionary matching provision, with or without a guaranteed minimum match, and determine the total match (if any) before the end of the plan year. You could also require that contributions be made only from profits. However, your plan won’t meet the safe harbor if it has a purely discretionary match and there are other restrictions if your safe harbor matching contributions exceeds the required match.
  3. Allocate contributions to the correct limitation year to avoid violating Section 415 maximum contributions limits. 
  4. You can’t pre-fund deductions by basing contributions on compensation not yet earned by participants.
  5. Notify employees promptly of any change to your employer contribution rules.

Plan sponsors who are restoring or changing their 401(k) employer contribution might also take this opportunity to evaluate whether it makes sense to adopt an automatic enrollment program or other plan design changes.