Timing is Key When Funding Matching Contributions
By Anne Freelove, QKA
When should matching contributions be funded?
Many defined contribution qualified plans, such as 401(k) plans, allow employers to make a matching contribution. Providing a match may encourage employees to make elective deferral contributions to the plan. There are several guidelines that may affect when matching contributions should be made.
Matching contributions must be funded by the sponsoring employer’s tax return due date, including any extensions, if the employer takes a deduction for the match.
Some plan documents may specify the timing of matching contributions. Following the recent IRS-required Cycle 3 restatement for pre-approved defined contribution plans, many plan documents may now indicate the period over which match contributions are to be calculated (the matching contribution computation period). For a plan with a specified matching contribution computation period, the plan sponsor may find it easiest administratively to fund matching contributions at the end of the computation period. If matching contributions are funded more frequently than the plan’s stated matching contribution computation period, the plan sponsor may be required to “true up” the contribution by recalculating the match at the end of the computation period.
Some plans require participants to meet additional conditions to qualify for matching contributions for a plan year. In this case, it may be easiest administratively to fund matching contributions at the time that participants have met the allocation conditions. Often this may mean funding the match at year-end. Generally, any allocation conditions for matching contributions will be specified in the plan document. Funding a matching contribution before participants have met the plan’s allocation conditions may result in ineligible employer contributions.
If the matching contribution formula is discretionary, the employer may need to give a notice to the plan administrator or trustee with information about the matching formula being used and the period over which it is applied. If this notice is required, a summary of this information must also be given to participants no later than 60 days after the last discretionary match is funded for a plan year.
For a plan that is subject to ACP testing, funding match contributions by the plan’s ADP/ACP refund deadline will help the plan sponsor to avoid a potential IRS penalty for corrective distributions processed after the deadline. For most plans, this deadline is 2½ months after the plan year ends. (Some plans with an Eligible Automatic Contribution Arrangement (EACA) auto-enrollment feature have up to six months to resolve a failing ADP/ACP test.)
If the plan design includes an ADP/ACP safe harbor match, the plan sponsor should be aware of special rules that apply to this type of matching contribution. If ADP/ACP safe harbor matching contributions are funded more frequently than once per year, then the match given on salary deferrals from a given plan year quarter must be funded by the end of the following plan year quarter. Plans with an ADP/ACP safe harbor match must provide an annual notice before the plan year begins that specifies the amount and formula of the matching contribution.
Finally, whatever the timing of the funding of matching contributions, the plan sponsor should ensure that they are operating the plan in a uniform and nondiscriminatory fashion. An example of a “best practice” is to fund matching contributions—based on the same computation period—with similar timing for all qualifying contributing participants.
