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How do discretionary matches affect nondiscrimination testing?

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Discretionary matches are flexible employer contributions that must still be included in nondiscrimination testing. Employers should document these contributions to ensure they do not disproportionately benefit highly compensated employees (HCEs) and cause testing failures.

Reporting Discretionary Matches for Nondiscrimination Testing

Employers must report the intended discretionary match on the annual compliance questionnaire to ensure proper inclusion in Actual Contribution Percentage (ACP) testing. This helps confirm that contributions meet nondiscrimination requirements and do not unfairly favor HCEs.

Notifying Employees About the Discretionary Match

The IRS requires employers to notify employees in writing about discretionary matches. The timing of this notice depends on when the employer funds the match:

  • If the match is funded annually, employees must be notified within 60 days after the contribution has been made to the plan.
  • If the match is funded more frequently (e.g., with payroll, monthly, or quarterly), employees must be notified within 60 days after the last matching contribution has been deposited for the plan year.

Determination Periods for Discretionary Matches

The plan document specifies whether a discretionary match follows an annual determination period or a per pay period determination period:

  • Annual Determination Period: The match is calculated based on total eligible compensation and deferrals for the entire plan year. This ensures that employees receive the full match they are entitled to, even if their contributions varied throughout the year.

    • Funding Timing: Employers may deposit the match annually at year-end or with each payroll throughout the year.
    • True-Ups: If the match is made per payroll but calculated annually, a true-up contribution may be required to ensure employees receive their full eligible match.
  • Per Pay Period Determination Period: The match is calculated based on each individual pay period, meaning employees receive matching contributions only on what they deferred in that specific paycheck.

    • True-Ups Are Optional: Employers can provide a true-up contribution at year-end, but it is not required under this method.
    • Potential Impact on Employees: If an employee maxes out their 401(k) contributions early in the year, they may miss out on employer matching contributions in later pay periods if the plan follows a per pay period match determination.

Employers should select the determination period that aligns with their plan goals and ensure it is properly documented in the plan document and communicated to employees. Proper reporting and administration help maintain compliance and ensure fair benefits for all participants.