Meet Your Match – Calculation Periods and True-Ups

Accurately calculating matching contributions can be a complex process and requires close attention to the details specified in the plan document.  One provision that may cause confusion for plan sponsors is the match calculation period.

Generally, the match calculation period is either the plan year or the pay period.[1]  Depending on the period specified, each participant’s matching contribution should be based on the eligible compensation and deferrals over the course of the full plan year or separately calculated each pay period based on the eligible compensation and deferrals for each pay period.

Problems may arise when a plan calculates and contributes (i.e., allocates) participant matching contributions based on a period that differs from the calculation period specified in the plan document.  While it is permissible to allocate the matching contributions more frequently than the calculation period specified in the plan document, doing so may require the plan sponsor to make a “true-up.”  A true-up is an allocation of matching contributions to ensure that participants receive the entire matching contribution to which they are entitled based on the terms of the plan document.

The following scenarios provide an example:

The ABC Corp. Plan matches 100% of employee deferrals up to 3% of compensation.  Ben receives $60,000 in annual compensation (paid semi-monthly) and defers 5% of his compensation each pay period for the first 6 months of the year and 1% of his compensation each pay period for the last 6 months of the year.  If ABC Corp. allocates the matching contributions on a pay period basis, the matching contributions are calculated as follows:

1/1 – 6/30 7/1 – 12/31
Compensation Per Pay Period $2,500 $2,500
Total Compensation $30,000 $30,000
Deferrals Per Pay Period $125 $25
Total Deferrals $1,500 (5%) $300 (1%)
Match on Salary Deferred $900 $300

 

Ben’s total matching contribution using the pay period calculation method is $1,200.

However, if the match calculation period for the ABC Corp. Plan is the plan year, Ben’s matching contribution would be calculated as follows:

1/1 – 12/31 Effective Rate
Total Compensation $60,000
Deferral $1,800 3%
Match on Salary Deferred $1,800 3%

 

Ben’s total matching contribution using annual compensation and deferrals is $1,800.

Accordingly, if the ABC Corp. Plan provides that the calculation period is the plan year, but the plan allocates the matching contributions each pay period, the plan would need to make a true-up allocation at the end of the plan year of $600 (i.e., the $1,800 that results from the plan year calculation minus the $1,200 that was actually allocated over the course of each pay period) to follow the terms of the plan document.

If a plan states that the period for calculating matching contributions is the plan year, it is important that the plan sponsor make any required true-up allocations following the close of each plan year to avoid a possible operational failure and plan disqualification.  If there is a failure to make true-up allocations or to otherwise correctly follow the timing requirements for matching contribution calculations, the plan sponsor may be required to fix the failure through the IRS’s Employee Plans Compliance Resolutions System.

If you have any questions, please contact our dedicated qualified plan team.

[1] Plans are permitted to designate other periods as the calculation period; however, the plan year and each pay period are the most prevalent periods designated.

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