IRS Has New Requirements for Employer Discretionary Matches

Every six years, sponsors of 401(k) plans that utilize pre-approved plan documents must update those documents and file them with the IRS for approval. Then, employers using these pre-approved plan documents must adopt the updated pre-approved plan. Employers must adopt the most recent Cycle 3 restatement by no later than July 31, 2022.

The IRS has new Cycle 3 restatement requirements for employers that utilize a fully discretionary matching contribution formula to their pre-approved plans. In order to comply with the “definitely determinable benefits” requirement in which a plan is required to provide a definite predetermined formula for allocating plan contributions, employers must satisfy two requirements when approving a discretionary match:

  1. Provide the plan administrator or trustee with written instructions describing:
    • How the discretionary match formula will be allocated to participants (e.g., a set dollar amount or a uniform percentage of contributions);
    • The computation period(s) to which the discretionary matching contribution formula applies (e.g., each pay period, each calendar month, quarterly, semi-annually, or end of plan year); and
    • If applicable, a description of each business location or business classification subject to separate discretionary match formulas.
  1. Provide plan participants who receive a discretionary match allocation with a summary of the written instructions no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.

Employers with individually designed plans should consider fulfilling the above requirements when approving a discretionary matching contribution as it remains unclear whether the IRS intends for the new requirements to apply to all discretionary matches.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.