If you sponsor a 401(k) plan and utilize a pre-approved document, such as a prototype plan document, you may have recently received an updated plan adoption agreement from your plan vendor for your review and signature. This is part of a normal cycle for pre-approved plans—every six years, plan vendors file their updated 401(k) documents with the Internal Revenue Service for approval, and once such approval is obtained, that approved document must be adopted by their employer-customers. In this cycle (referred to as Cycle 3 since this is the third time plan vendors have gone through this process), employers must adopt their updated pre-approved plan no later than July 31, 2022.
If you are an employer who is adopting an updated pre-approved plan this cycle, and if you have elected discretionary matching contributions, make sure you have reviewed the plan’s requirements regarding that discretionary match. Specifically, if you choose a fully discretionary match, which is one where you do not pre-select the rate or period of the matching contribution, then you must satisfy two requirements when approving a discretionary match:
- You must provide the plan administrator (or trustee, if applicable), written instructions describing (1) how the discretionary matching contribution will be allocated to eligible participants, such as a uniform percentage of contributions or a flat dollar amount, (2) the computation period(s) to which the discretionary matching contribution formula applies, such as each pay period or the entire plan year, and (3) if applicable, each business location or business classification subject to separate discretionary matching formulas. The instructions must be provided by the date the plan sponsor funds the discretionary matching contribution.
- Participants who receive the discretionary matching contribution must be notified of the same items described above within 60 days following the date the discretionary match is made to the plan.
Employers should also check their new pre-approved document to see if it dictates who must approve the discretionary matching contribution; some may require action to be taken by the employer’s board of directors or similar governing body.
It is not clear whether these notice requirements also apply to individually-designed plans, but employers that sponsor such plans would be advised to follow the same protocol when approving a discretionary matching contribution, in case this language signals the IRS’s broader expectations for discretionary matches.