Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

401(k) Employer Matching

Does your 401(K) Plan offer an Employer matching contribution to employees?  Are you a Plan administrator?  How comfortable are you with the Employer match made each year or each pay period?  Theoretically, there should be no mistakes in the Employer match because you use a third party payroll provider who has a systematic process for calculating the match, right?  Unfortunately, there are Employer match mistakes made, and the responsibility of the Employer match will generally fall back on you, as Plan administrator.

The following are some examples of how the Employer match could go wrong.

Background – Your Employer matches 100% up to 3% of eligible compensation that you are deferring.  For example, your eligible compensation is $100,000 a year and you contribute 3%. In this case your elective deferral would be $3,000 ($100,000 * 3%), and your Employer match would be $3,000 (100% * $3,000 elective deferral).

Issue #1 – If you have an employee that makes in excess of the IRS compensation limits ($245,000 for 2010 and 2011), you should ensure that your Employer match % is being calculated only up to the $245,000 and not total eligible compensation. Example – at $245,000 eligible compensation max Employer match @ 3% employee deferral rate would be $7,350 ($245,000 *3% employee deferral rate * 100% Employer match).
If the Employer match is taken at any higher compensation, then that would result in an Employer match that would need to be refunded to the Plan.

Issue #2 – If your Plan has a service requirement prior to receiving the Employer match, you should ensure that your third party administrators have accurate personnel information so that the Employer match is started at the correct time.  If an employee is allowed to receive an Employer match prior to the service terms being met, that amount should be refunded to the Plan.

Issue #3 – If your payroll reports categorize individuals into certain “divisions” or “code sectors”, then your Employer match may not be catching compensation at all divisions or code sectors, resulting in the Employer match deficiency. This would require the Plan to make a correcting contribution to the employees accounts impacted.

Issue #4 –  Lets say you elect to contribute a flat dollar amount of $635 (per pay period) in order to max out your 401(K) for the year at $16,500 (assuming 26 pay periods, $635 *26 = ~$16,500).  You also elect to contribute a catch up contribution of $212 (per pay period) in order to max out your 401(K) given you are over 50 yrs of age. (assuming 26 pay periods, $212 * 26 = ~$5,500, and max contribution is $16,500 + $5,500 = $22,000 for 2010 and 2011.  Calculation issue – your systematic calculation may not be configured to correctly apply the % match to your total contribution of $846 ($635 + $212), and instead may be matching both the $846 and then the $212, which could potentially cause an overmatch to the Employee. This is because the match % is based on the compensation for the period, and if the system is thinking you were paid twice (given there were two separate contributions), it may be calculating the match on two compensation amounts, versus one payroll compensation amount.  This would require a refund of the Employer match to the Plan.

Wrap-up

The above issues are just a few of the issues that could go wrong with an Employer match.  Having a reputable third party payroll provider does not make the Employer match process error-free, or relieve the Plan administrator from the responsibility of ensuring the Employer match contribution is correct.  If errors in the Employer match are identified, then corrective actions should be taken as soon as possible to avoid penalties and fees.  Please feel free to contact us if you have any questions regarding your Plan’s Employer match.

Victor Fuentes