By: Adrienne I. Moore, Esq.

Dr. Frank N. Furter owns a plastic surgery clinic, The Frankenstein Place, which sponsors a 401(k) plan. The Frankenstein Place had an especially profitable year in 2022. When it comes time to complete the annual administration, Dr. Furter decides to fund a matching contribution for the employees. He asks Magenta, who handles the company’s payroll, to fund a matching contribution of 100% of deferrals up to 5% of compensation to everyone who was still working for The Frankenstein Place on the last day of 2022. Magenta quickly calculates the matching contribution and funds it to the Plan on the last day of December 2022, right after the last payroll of the year processes. In early 2023, the Plan’s third party administrators, Brad and Janet, send Magenta an annual information request package. Magenta returns the census and contribution information on March 1, which shows the matching contribution. As Janet is reviewing the data, she realizes the matching contribution has been funded but that The Frankenstein Place did not provide anything in writing confirming the match and how it is to be allocated. Additionally, no notice was provided to the participants, and more than 60 days have passed since the match was funded. Finally, Janet sees that Magenta applied a last day requirement to the matching contribution, per Dr. Furter’s instructions, even though the Plan document does not provide for any conditions to receive a matching allocation. Brad and Janet quickly head over to The Frankenstein Place to meet with Dr. Furter to discuss resolving these issues.

Let’s Do the Time Warp Again

Those who pay diligent attention to plan documents likely noticed that the most recent defined contribution Cycle 3 documents have some new language about discretionary matching contributions. In particular, the plan sponsor may elect that the allocation of the matching contribution may be determined in the sponsor’s discretion each year if the sponsor provides written instructions to the Plan Administrator or adopts a Board resolution regarding how the match is to be allocated.  These instructions must be provided not later than the date on which the discretionary matching contribution is deposited to the Plan. Additionally, participants must be notified of the match no later than 60 days after it is funded. What surprises many in the industry is to learn that this is not a new requirement.

The Treasury Regulations tell us that profit sharing plans must provide for a definite predetermined formula for allocating contributions to participants. In the same way that benefits in a defined benefit plan must be “definitely determinable,” contributions in a defined contribution plan must be definite. How does this work when a plan document provides that the contribution formula is discretionary on the part of the plan sponsor? In a 1998 memorandum by then Employee Plans Division Director, Carol Gold, to the then Chief of the EP/EO Cincinnati Key District, the IRS took the position that, for any discretionary formula to be definitely determinable, the plan terms must specify how amounts will be allocated. Although this memo addressed a situation involving a non-elective contribution, the IRS has remained consistent with this position for all employer contributions, which is why the Cycle 3 documents are required to specify any allocation conditions, even if the formula for the match is determined annually. The contribution formula may be discretionary, so long as how contributions are allocated is determined by the document. Additionally, the 1998 memo states that, even if the employer has discretion as to the amount of contributions, which a discretionary match formula does provide, the employer must notify the trustee, in writing, of the amount of those contributions. The result is that any plan sponsor that determines the amount of matching contributions annually must provide written confirmation to the plan trustee each year as to how the match will be calculated.

An additional requirement was added to some Cycle 3 documents: participants must be notified of the amount of the matching contribution within 60 days of it being funded. Failure to provide such written notice, then, is both a violation of Internal Revenue Code §401(a) and an operational failure to follow the terms of the plan document.

 I Can Make You a Match

Brad and Janet meet with Dr. Furter and Magenta to discuss what to do. They explain how the matching contribution must be documented and that participants will need to be notified of the amount. Dr. Furter, as the sole director for The Frankenstein Place, adopts a resolution confirming the manner in which the matching contribution will be allocated for 2022. Dr. Furter is also the sole trustee of the Plan, so he hands the resolution to himself with a flourish. How ‘bout that. Janet prepares a notice to participants explaining the match and Dr. Furter provides it to the applicable participants immediately.

Additionally, Janet determines that one employee, Riff Raff, terminated employment before the end of 2022 and was improperly excluded from receiving a matching contribution under Magenta’s original calculations. The correction here is easy – the Plan (and the participant) must be made whole. This is the appropriate correction under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). Janet calculates a 5% match for Riff Raff based on his 2022 compensation and deferrals. Since Riff Raff is receiving the match much later than the other employees, Janet also calculates the lost earnings on his match using the actual rate of return on his investments from the date that the match should have been deposited (i.e., when it was funded to the other participants) through the date of correction. For more on calculating lost earnings, check out our prior Solution here.

You Better Wise Up, Janet Weiss

This correction still needs some final documentation. Because The Frankenstein Place failed to follow the terms of the Plan document related to the matching contribution, there has been an operational failure. EPCRS provides for both a Voluntary Correction Program (“VCP”) and a Self-Correction Program (“SCP”). VCP is a formal process that requires a filing to be submitted to the IRS, whereas SCP is completed by a plan sponsor internally. Brad and Janet review the rules and advise Dr. Furter that, because Dr. Furter had procedures in place designed to ensure the Plan’s overall compliance, they believe the failure qualifies as an Eligible Inadvertent Failure (“EIF”). EIFs may be resolved through SCP. Janet prepares a memo for Dr. Furter’s files documenting the self-correction of the matching failure. As part of this memo, Dr. Furter adopts additional procedures related to the matching contribution. Specifically, Dr. Furter will wait until after each Plan year and review any desired matching contribution with Brad or Janet prior to funding to ensure there is a second set of eyes on the operations. To learn more about SCP and EIFs, you can read our prior Flashpoint here.

Altogether, it is a good result for The Frankenstein Place. Employees receive their match, Dr. Furter learns more about his Plan, and Janet adds a reminder to her calendar for December 1 to check in with Magenta before anything gets funded.

If you have questions or issues with a misguided matching contribution, call us.  We are your ERISA solution!

Additional Guidance:

Internal Revenue Service Memorandum, March 13, 1998.
Treasury Regulation §1.401-1(b)(1)(ii)
EPCRS: Revenue Procedure 2021-30
IRS Notice 2023-43