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401(k) Snafu - Matching Contribution the issue?

By David Evans, CFP®, AIF posted 08-08-2014 09:13

  
The Plan is required to use the definition of compensation that is selected.  As it relates to employee deferrals, there should not be a situation where the employee deferrals don't reach the annual maximum.  I wonder if the real issue is the matching contribution.  When higher paid employees are contributing at a high deferral % - i.e. 20%, the result is that deferrals will cease by month four or five and as a result the participant doesn't receive the full amount of their matching contribution.  However, prototype plan documents allow for a selection of a "true-up" contribution which allows the administrator to look at the participant's total plan compensation at a later point in time e.g. $250k and then compare the matching contribution at the end of the year and if the participant received less than the full amount by virture of having their deferrals ceased earlier in the year, the plan then "trues-up" the match so the particpant receives the full amount of the matching contribution.
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