Every six years, plan sponsors are required by the IRS to update their plan documents for legislative changes that occurred over the previous six years. The following updates should be part of your plan documents this cycle:
Trust and/or Custodial provisions must be removed from the Cycle 3 adoption agreements. Most document providers leverage standalone trust and custodial Agreements with their clients. If there is a conflict between the terms of the trust and that of the plan document, note that the plan documents rule.
Employer Match – “Flexible Discretionary” and “Rigid”
Flexible discretionary match language aligns with the discretionary match provisions from the Pension Protection Act (PPA) document. This provides employers with maximum discretion to determine the matching contribution formula, limitations, allocation period and recipients. An employer can use different formulas for different participants. However, the IRS imposed a new notification requirement for plan participants when these truly discretionary match amounts are made. Employers, under this requirement, must provide written instructions to the plan administrator or trustee, describing in detail how the match will be allocated. The employer or plan administrator must communicate a summary of those instructions to the participants within 60 days after the date the flexible discretionary match is made to the plan.
Rigid discretionary match language allows an employer or sponsor to choose match parameters that avoid this notification requirement. The employer still has the discretion to determine:
- If the match will be made,
- The rate at which the match will be made, and
- The limitations on the match allocation.
The match will be allocated to all participants who satisfy the allocation conditions based on the employer’s determinations.
Match True Up
This cycle, the IRS requested the removal of the “true up” option, which previously allowed employees to benefit from the greatest amount of employer-matched funds. Selections in the computation period now indicate if a true up is needed, and plan sponsors do not need to have a true up based on the election. However, the choice is no longer discretionary. If an employer makes a flexible discretionary match that requires a “true up,” it must be part of the communication to the plan participants.
ADP and ACP Corrective Contribution Approaches
Under Cycle 3, you can indicate the corrective contribution to be made (Qualified Nonelective Contribution, QNEC, or Qualified Matching Contribution, QMAC) and how it will be allocated (fixed or flexible formula). An employer that selects the flexible formula is required to communicate the definite determinable allocation formula in writing to the trustee each plan year. Regardless of the selection, the employer may still distribute excess contributions to correct a failed actual deferral percentage (ADP) or actual contribution percentage (ACP) test.
Irregular Pay (Bonuses)
In the Administrative Procedures section of the PPA adoption agreements, it states that an employer could elect to:
Permit separate deferral elections that would apply to irregular pay (such as bonuses) and not apply the existing deferral election to the irregular pay,
- Apply a participant’s existing deferral election to irregular pay and not permit a separate election, or
- Apply an existing election to irregular pay, unless the participant made a separate election for irregular pay.
The Cycle 3 documents allow employers to permit participants to make a separate election to defer irregular compensation. However, the documents seem to indicate that a participant’s existing deferral election will apply to any irregular compensation paid, unless a separate election was completed that will apply to irregular compensation.
The Cycle 3 Basic Plan documents appear to have some flexibility. In fact, there is a section that states that an employer may, on a uniform and nondiscriminatory basis, permit different salary deferral elections for different items of compensation (for example, a separate salary deferral election for bonuses) and may exclude one or more items of irregular pay for purposes of calculating elective deferrals.
For support implementing updated plan documents or to speak with our team of experts, please contact us: