As employers continue to struggle with these difficult economic times, many employers are attempting to cut costs by eliminating or reducing their matching contributions. The following FAQs deal with the issues relating to the elimination or reduction of a matching contribution formula:

1. May an employer eliminate or reduce a fixed matching contribution formula in a traditional 401(k) plan mid-year? If so, will the employer need to fund the match through the date of the amendment?

Yes. An employer may amend a plan to eliminate or reduce a fixed matching contribution mid-year. If a participant has met the allocation conditions as of the date of the amendment, the plan will need to fund the matching formula up to the date of the amendment. However, if a participant has not satisfied the allocation conditions as of the date of the amendment, the employer will not need to fund the match.

Example: RTD maintains a traditional 401(k) plan with a fixed matching contribution formula of 50% of elective deferrals not exceeding 6% of compensation for the plan year. The plan imposes no allocation conditions on the match. In March 2009, RTD determines it cannot afford the match so it amends the plan to eliminate the match. The amendment is effective as of March 15, 2009. RTD will need to fund the match based on deferrals and compensation through March 15, 2009. In drafting the amendment, the employer should make certain the amendment limits compensation for purposes of the match allocation to compensation earned as of the date of the amendment.

Example: Assume the same facts as in the previous example except the plan imposes a last day of the plan year employment condition on the match. The employer will not need to fund the match for the year because no participant satisfied the allocation condition before the employer eliminated the match.

Example: Assume the same facts as in the previous example except the employer was funding the match on a payroll basis. The employer would still be able to eliminate the match. However, any attempt to retrieve the match contributed would create potential legal issues, since the employer already allocated the match to the participants’ account notwithstanding the last day condition. The employer would be better advised to amend the matching formula consistent with its funding and eliminate the match prospectively.

2. If an employer eliminates a match (fixed or discretionary) in a traditional 401(k) plan must it provide a notice to the participants?

No. The regulations only require safe harbor 401(k) plans to provide a notice to employees upon reducing or eliminating a match formula during the plan year. Nevertheless, the employer may want to provide a notice to alert the employees to the change so they can modify their deferral elections if they wish. Of course, the amendment will need to be reflected in a summary of material modifications (SMM). However, the SMM is not due until 210 days after the close of the plan year in which the employer makes the amendment.

3. If an employer with a discretionary match provides a communication (e.g., notice) informing the participants of the match it will make the for the plan year, may the employer ignore the communication and not provide the match?

Such a fact pattern raises a difficult issue for the employer. The employees may have relied on the communication in deciding the amount of their deferrals. If the plan document (and SPD) makes it clear that the match is discretionary, the IRS probably would not have any qualification concerns. However, the participants may bring an action under ERISA. To avoid the possibility of litigation, the employer might consider providing another communication advising the employees that it does not intend to make matching contributions after a particular date, and funding the match through that date. Also, in the future, it should include language that reflects the discretion in the formula (e.g., “intends” to make the match).

Retirement Plans in a Troubled Economy
SunGard Relius will present a one-day seminar in which it will address the numerous issues practitioners are confronting in these difficult economic times, including eliminating or reducing a safe harbor contribution formula. For more information on the topics covered in this timely course and registration information, go to our seminar web page.