For plan sponsors with a pre-approved 401(k) plan document that contains a discretionary matching contribution, there is a new compliance requirement. This new requirement is a result of the IRS-required Cycle 3 Restatement issued in 2022. This new requirement is needed in any year when a discretionary match is made.
Even though a discretionary match gives a plan sponsor flexibility, the IRS still requires plans to meet the “definitely determinable benefits” standard under Treasury Regulation §1.401-1(b)(1)(i). In simple terms, a plan must include a clear, predetermined formula for how contributions will be allocated.
To meet the new requirement, pre-approved plan documents with discretionary matching contributions must contain the required complaint language and meet two notice requirements.
1. Provide Written Instructions to the Plan Administrator
The employer must give the plan administrator or trustee written details describing:
- how the discretionary match formula will be allocated to participants (e.g., a uniform percentage or a flat dollar amount);
- the computation period(s) to which the discretionary matching formula applies; and, if applicable;
- a description of each business location or business classification subject to separate discretionary match formulas.
The written instructions must be provided no later than the date the discretionary match is deposited.
2. Send Participants a Summary
The plan sponsor must also notify any participant who receives a discretionary match of the instructions above within 60 days after the final match for the plan year is made.
Note that these new requirements do not apply to pre-approved 403(b). Only pre-approved 401(k) plans must comply, as 403(b) plans follow a separate Restatement Cycle process and are not subject to these same notice obligations.
Employers should work with their document providers and recordkeepers to ensure their internal processes align with these requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.
If you have any questions about the notice or if you are required to send the notice, please contact any of Bricker Graydon’s employee benefits attorneys.
