“Definitely Determinable” is one of those pre-ERISA concepts that are still applicable. It means that in order for a retirement plan to be considered “qualified” (eligible for favorable tax treatment), a participant’s retirement benefit had to be determined in accordance with a stipulated formula that is not subject to the discretion of the employer.
The purpose of which is, of course, to eliminate the possibility of benefits favoring the higher paid employees. It’s long been required for defined benefit pension plans in which it’s a straightforward matter.
But what about those 401(k) plans that provided a discretionary employer discretionary match? Until recently, an employer matching contribution that was discretionary did not have to be stated in the plan document. But now the IRS has taken the position that a discretionary employer match must also be definitely determinable.
Here is what an employer needs to do if its match is discretionary.
The New Requirements
As part of the required Cycle 3 Restatement of 401(k) plans, employers must follow a three-step process to meet IRS requirements.
First, the employer must specify the amount and the allocation method for any matching contribution in a resolution of its governing body whether a Sole Proprietorship, Partnership, Limited Liability Partnership, Limited Liability Corporation, C corporation, or S corporation,
Second, the employer must provide written instructions to the Plan Administrator (or Trustee, if applicable), that describes:
- How the discretionary employer matching contribution formula will be allocated to participants, e.g., a uniform percentage of matched employee contributions or a flat dollar amount;
- The period to which the discretionary employer matching contribution formula applies which could be 1) each pay period, 2) each calendar month, 3) quarterly, 4) semi-annually, or 5) end of Plan Year. It does not have to be the same as the date the employer funds the match; and
- If applicable, a description of each business location or business classification subject to separate discretionary employer matching contribution allocation formulas.
Third, a summary of those instructions must be communicated to plan participants outlining the applicable matching formula, the period used to calculate the match, and when it will be deposited.
Best Practices
The new requirements are not particularly onerous, but make sure to include them in your annual plan administration procedure; and add them to your Fiduciary Checklist. What’s a Fiduciary Checklist? You can read about it here.
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