New Discretionary Match Contribution Communication to Participants

Many employers who sponsor a 401(k) plan use a pre-approved plan document with adoption agreements. Every six years, plan document providers update their 401(k) documents with regulatory changes and file them with the Internal Revenue Service (IRS) for review and approval. Once the documents have been pre-approved by the IRS, employers must adopt this pre-approved plan by a certain date. Most recently, the pre-approved Cycle 3 plan documents were required to be adopted and signed by plan sponsors no later than July 31, 2022.

In this pre-approved Cycle 3 document, the IRS added the requirement that employers must begin to provide a discretionary match communication to eligible employees beginning the Plan Year following the Cycle 3 401(k) plan document adoption. Originally the IRS had considered eliminating discretionary match provision due to Treasury Regulation 1.401-1(b)(1)(ii), that states “plans must provide a predetermined formula for allocating the contributions made to the plan among the participants,” which is often referred to as “definitely determinable benefits.” A discretionary match provision allows employers to avoid a definitive match formula or the match computation period (pay-to-pay, quarterly, annually) in the plan document. The IRS agreed to continue to allow discretionary match provisions on the condition that plan sponsors provide in writing to the trustee/recordkeeper the exact details of the discretionary match and send a discretionary match communication to participants.

The discretionary match communication must provide the eligible employee details of the discretionary match, such as the formula or flat dollar amount allocated to participants as well as the timing of the allocation, such as pay-to-pay or annually. Additionally, the communication must provide information if the match is different per divisions or job classes. And, if the plan provisions provide for a true-up contribution, which means the match is based upon the entire plan year contributions, this must be included in the communication. The actual match contribution amount the participant receives will be part of the employee’s benefit statement, not this general communication.

At first, the IRS proposed this summary to employee be designated a regulatory notice and then agreed to allow it to be considered a required participant communication. Many employers restated their 401(k) plan in 2021, which means this communication is due for the 2022 plan year. The communication to participants may be provided any time before the deadline, which is 60 days after the employer allocates the final match contribution. For example, if a company restated their plan for Cycle 3 in 2021 and allocated the final matching contribution for an annual match for plan year 2022 on April 1, 2023, then the communication must be provided to the employee by May 30, 2023. Some plans allocate the match contribution pay-to pay. For a calendar year plan allocating the match pay-to-pay, the deadline for this communication would be 60 days after the final contribution, which would be approximately early March. This discretionary match communication may be provided electronically to employees.

An employer match contribution enhances an employee’s savings for retirement and is a valuable provision in a retirement plan. This annual communication provides a great opportunity for employers to highlight this employer match benefit to employees.

To ensure compliance with this new requirement, Greenleaf Trust will review plan document match provisions for clients who utilized our plan document service to adopt the Cycle 3 401(k) restatement. Greenleaf Trust will work with the plan sponsor, who elected a discretionary match provision, to meet this requirement by collecting written documentation of the discretionary match from the employer, as well as prepare and send the communication electronically to the participants prior to the deadline.