Stopping a Matching Contribution These challenging economic times have made it imperative for many employers to consider cutting benefits that were previously regarded as necessities for companies that wanted to compete for and retain talented employees. Eliminating a matching 401 (k) plan contribution is one example. The issue has raised a number of questions. If an employer is going to stop a discretionary match that has been given on an annual basis for a number of years, must employees be informed before the plan year begins? No. Although it may seem strange in this world of full disclosure, by definition, a discretionary contribution allows an employer to decide each year whether to make a matching plan contribution and then inform the plan participants. There is no legal requirement to give notice when such a contribution will not be made; it may be discontinued or modified without prior notification. However, many employers do inform their employees to soften the blow to morale that a lack of communication may cause. Many employers provide the same discretionary matching contribution year in and year out. Although this makes it easy for employees because they know what to expect, it makes it difficult for employers to retain the flexibility not to make such contributions. Some employers inform their employees before the first day of the plan year that they will not be making a discretionary matching contribution, thus permitting employees to adjust the amount of their deferrals. What is the procedure for stopping a matching contribution? To remove a fixed matching formula that is written into a plan document, a plan amendment is required, and employees must be informed of such an amendment through either a new Summary Plan Description (SPD) or a Summary of Material Modifications (SMM). Strangely, the deadline for providing an SMM is 210 days after the close of the plan year in which the employer makes the amendment, which is likely to be long after the participant receives their benefit statement showing that no contributions was made. Yes. However, if the allocation requirement (such as employment on the last day of the year) has already been met, then the matching contribution must be made through the amendment date. Thus, the amendment must be prospective. However, if the allocation requirement has not been satisfied, then the amendment can be made with retroactive effect. Note that different rules apply to safe harbor 401(k) plans, where 30 days’ advance notice must be given before the amendment becomes effective. If the employer matches on a payroll-by-payroll basis, may the match be stopped?
May an employer amend a plan and remove a match that is written into the plan document after the plan year has started?