MJG CPA Posted November 16, 2007 Report Share Posted November 16, 2007 I am looking for some guidance on the proper calculation of the employer match on a defined contribution plan(such as a 401(k) or Simple IRA). I keep getting different answers from the plan trustee, depending on who I talk to. My last call, I was told to consult a tax adviser! In particular, my question is whether compensation earned prior to an employee's entry date into the plan is counted when calculating the co match. For instance, employee becomes eligible to participate in the plan on Oct. 1st. Wages earned prior to Oct. 1st are $30,000 and wages after Oct 1st are $10,000, for annual compensation of $40,000. The employee contributes $2,000 to the Simple plan from his last quarter wages. If the company match is "dollar-for-dollar up to 3% of compensation" is the maximum company match 3% of $10,000 ($300) or 3% of $40,000 ($1,200)? Can anyone direct me to a source for reliable information on this subject? Quote Link to comment Share on other sites More sharing options...
TAXBILLY Posted November 16, 2007 Report Share Posted November 16, 2007 This may be of help. http://www.irs.gov/retirement/article/0,,id=137825,00.html taxbilly Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted November 16, 2007 Report Share Posted November 16, 2007 I am looking for some guidance on the proper calculation of the employer match on a defined contribution plan(such as a 401(k) or Simple IRA). I keep getting different answers from the plan trustee, depending on who I talk to. My last call, I was told to consult a tax adviser! In particular, my question is whether compensation earned prior to an employee's entry date into the plan is counted when calculating the co match. For instance, employee becomes eligible to participate in the plan on Oct. 1st. Wages earned prior to Oct. 1st are $30,000 and wages after Oct 1st are $10,000, for annual compensation of $40,000. The employee contributes $2,000 to the Simple plan from his last quarter wages. If the company match is "dollar-for-dollar up to 3% of compensation" is the maximum company match 3% of $10,000 ($300) or 3% of $40,000 ($1,200)? Can anyone direct me to a source for reliable information on this subject? We just went through something similar. In our case, it was bonuses and terminations (do we have to match the severence pay or bonus pay deferrals that an employee may elect to make?). Our answer was - "How is your plan written?". We went back to the plan and it was not clear. We ammended the plan to spell out exactly wat was eligible wages for matching contributions. Canned 401K plans can be good, but you have to understand them when you implement. The language governs the rules, and if the language is not clear, you could end up matching more than the owner anticipated or vice versa. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
MJG CPA Posted November 16, 2007 Author Report Share Posted November 16, 2007 We just went through something similar. In our case, it was bonuses and terminations (do we have to match the severence pay or bonus pay deferrals that an employee may elect to make?). Our answer was - "How is your plan written?". We went back to the plan and it was not clear. We ammended the plan to spell out exactly wat was eligible wages for matching contributions. Canned 401K plans can be good, but you have to understand them when you implement. The language governs the rules, and if the language is not clear, you could end up matching more than the owner anticipated or vice versa. Tom Lodi, CA This is exactly what I'm running into. I have looked at the Pub's and the plan prototype document, and the instructions for the prototype form, and it just says the match is calculated on "eligible" wages, but doesn't define what is eligible. I'm still looking for answers, but I'm guessing there won't be anything definitive unless, as you say, we amend the plan. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted November 16, 2007 Report Share Posted November 16, 2007 This is exactly what I'm running into. I have looked at the Pub's and the plan prototype document, and the instructions for the prototype form, and it just says the match is calculated on "eligible" wages, but doesn't define what is eligible. I'm still looking for answers, but I'm guessing there won't be anything definitive unless, as you say, we amend the plan. Here was the "on the side" advice we got prior to amending the plan. If no one is fussing about the match, and doing what you want to do is not going to cause a fuss, then do what you want to do. If the plan can be interpreted many ways, and one of those ways is the way you want, do it the way you want. But don't put off making the amendments. I don't think the fear should be in how the deduction flies with the IRS, it is in how the employees will react to your decision. I would rather face an audit than a lawsuit. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
B. Jani Posted November 17, 2007 Report Share Posted November 17, 2007 http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf item no. 4 and click on more. B. Jani Quote Link to comment Share on other sites More sharing options...
TAXBILLY Posted November 17, 2007 Report Share Posted November 17, 2007 Very useful info. Thanx. taxbilly Quote Link to comment Share on other sites More sharing options...
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