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Plan’s Matching Formula May Require Additional Employer Contributions

Our 401(k) plan’s match formula is 100% of a participant’s salary deferrals up to 3% of the participant’s entire-year compensation with the matching contributions being made at the end of each payroll period. If a participant stops making salary deferrals mid-year, would we have to make additional matching contributions for that participant?

Yes, if you haven’t made the amount of matching contributions required by the plan’s match formula when the participant stops making salary deferrals, you'll have to “true-up” the matching contributions for the participant.

Many plans require the employer to match salary deferrals up to a percentage of a participant’s total compensation for the plan year (up to $250,000 for 2012). So, if a participant stops or decreases their salary deferrals during the year, you may owe the participant an additional match.

Example:
Steve elects to contribute 5% of his $48,000 annual compensation to his 401(k) plan. Steve’s employer pays him $2,000 twice a month, deducts $100 (5% x $2,000) from his salary and contributes it to his 401(k) account. Steve’s employer contributes a matching contribution of 100% of his salary deferral up to 3% of his wages every pay period, or $60 (3% x $2,000). The 401(k) plan document requires Steve’s employer to use his entire plan-year compensation to determine the amount of the matching contribution. Steve stops making salary deferrals in May.

Pay period ending Steve's pay Steve's salary deferral Steve's matching contribution

January 15

 

$2,000 $100 $ 60

January 31  

 

 2,000  100   60

February 15  

 

 2,000  100   60

February 28  

 

 2,000  100   60

March 15  

 

 2,000  100   60

March 31

 

 2,000  100   60

April 15  

 

 2,000  100   60

April 30  

 

 2,000  100   60
May – December compensation $32,000 0 0

Totals for the year

 

$48,000 $800 $480
Amount employer must contribute to Steve’s account to comply with the plan’s match formula. $320

The plan requires Steve’s employer to make matching contributions of 100% of Steve’s salary deferrals up to 3% of his annual compensation (3% x $48,000). Even though Steve’s actual salary deferrals ($800) equaled only 1.6% of his annual compensation, his employer stopped matching when Steve stopped contributing in May. Steve’s employer must make an additional $320 ($800 - $480) in matching contributions equal 100% of Steve’s salary deferrals up to 3% of his annual compensation required by the plan document.

The plan must comply with its match formula even if a participant stops making or decreases their salary deferrals during the year.

Additional resources:

Page Last Reviewed or Updated: 27-Sep-2013