Annual Notice of Discretionary Match in ‘Pre-Approved’ 401(k) Plans May Be Required Soon!

Employers that provide 401(k) plans on documents that have been “pre-approved” by the Internal Revenue Service (IRS) beware: there is yet another annual notice requirement that may need to be added to your compliance list!

It is fairly common for 401(k) plans to include discretionary employer matching contribution provisions that don’t mandate any particular matching formula or contribution amount and instead leave those matters for resolution by the plan sponsor after the close of the plan year. Although many plan sponsors promptly communicate their decisions about the details of employer matching contributions to plan participants, there is not an express requirement in either the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code mandating this notification … or is there?

As part of the “Cycle 3” pre-approved plan restatement process, many 401(k) plans changed how discretionary matching contribution formulas must be documented and communicated to participants. Most pre-approved plan document providers removed provisions stating a plan’s discretionary match formula in the plan document. This revision gave plan sponsors more flexibility and avoided the need for a plan amendment every time the matching formula was changed.

In reviewing the Cycle 3 documents, the IRS agreed to allow this new built-in flexibility, provided that the plan document also had provisions to ensure the discretionary matching contribution formula was approved by the plan sponsor’s governing body, documented, and communicated to participants. To address this IRS expectation, a common approach used in the updated Cycle 3 documents is to include language requiring a notice to be provided to the “plan administrator” describing the matching contribution formula approved by the governing body in detail, including the period for which it applies (each pay period, each plan year, etc.). These Cycle 3 documents also require an annual notice to plan participants summarizing the information that is included in the notice provided to the plan administrator. This notice to participants is typically required to be provided no later than sixty days following the date on which the discretionary matching contribution is actually made to the plan. In most cases, the annual notice will be required for the first time in 2023 for the plan’s 2022 discretionary matching contributions. The actual deadline for the notice will depend on when the matching contributions are funded and how the document provider’s language reads.

Although the current IRS position on the new notice requirement is limited to pre-approved plan documents, it is possible that individually designed plans (i.e., those based on custom-drafted documents) will also be included in the future since the technical basis for the IRS’s position applies to all tax-qualified retirement plans.

Employers that use pre-approved 401(k) plan documents with discretionary employer matching provisions may wish to reach out to their document providers for more information about how these new notice requirements are addressed and for assistance in preparing the required notices. In addition, employers that use individually designed plans may want to remain vigilant for corresponding changes that apply to their plans.

Timothy G. Verrall is a shareholder in the Houston office of Ogletree Deakins.

Tracy L. Mounts is a paralegal in the Indianapolis office of Ogletree Deakins.