Last year at this time we were talking about amending 401(k) plans to eliminate matches and employer contributions. Today, I happened upon an article that suggested that employers are reinstating employer matches. If you are considering reinstating a 401(k) match (or any employer contribution), there are some things you should be aware of before you make that change.
1. When should you do it? Benefit plan administration is always cleaner if you make changes in advance of the plan year. You have to let participants know of changes prior to the commencement of that plan year, so a decision to reinstate (or even add) matches has to be made and notices have to be issued prior to the change.
You can certainly make mid-year changes to a plan. If you decide to reinstate a matching contribution mid-year, remember that you still have to do discrimination testing of both employee and matching contributions for the current plan year. That means that you suspended contributions under a safe harbor 401(k) plan, you can’t resume a safe harbor matching contribution midyear. You can resume safe harbor status by sending out a new safe harbor notice before the next plan year starts but you have to wait for the next plan year..
2. How much will I match? You have to be aware of what you previously had and how you ended or suspended. Are you reinstating a suspended match or are you making a new set of rules altogether? A lot depends on how you handled the suspension or elimination of the match requirement for prior years. It is not as simple as simply deciding on a figure.
If you are not certain you want to commit to a set figure, you could adopt a discretionary matching provision, with or without a guaranteed minimum match, and determine the total match (if any) before the end of the plan year. You could also restrict employer contributions to a profit sharing component. But be cognizant of safe harbor restrictions and also Section 415 maximum contribution limits.
3. Who Will Be Eligible? Whether reinstating a suspended employer contribution or adding a new one, discrimination concerns abound. It is not uncommon for bargaining unit representatives to share a plan with non-union employees. Check to see if the match is required (or even permitted) under any bargaining agreements. Also, make sure that the employer contribution does not overly favor highly compensated employees because you will want to avoid discrimination issues.
Giving back the match (or any employer contribution) is not as simple as turning the switch back on. In many respects, it's like adding an employer contribution for the first time. So make sure to consult with your benefit plan professionals before taking this step. It is a sign of good will to give back employer contributions as business improves. But don't do it without first checking to make sure your are doing it correctly.