(b)lines Ask the Experts – Match Maximization Problem

October 9, 2012 (PLANSPONSOR (b)lines) – “Our firm sponsors a 403(b) plan where we match 100% of employee elective deferrals, up to 5% of compensation.

“One of our executives just came to me and stated that, since her elective deferrals were cut off at the 402(g) limit for 2012 ($17,000) in September, that she will fail to receive her full matching contribution of 5% for 2012. Is this possible? And, if so, is it possible for the plan to address this issue and make the employee whole?”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

Yes, this situation is quite possible, and it is commonly known to the Experts and others as the “match maximization problem”. It is best illustrated by an example that might be similar to that of your executive. Let’s say we have a plan with the same employer contribution as yours, and Executive X, who earns $120,000 per year chooses to defer 20% of pay in 2012. Her contributions, by month, are as follows.    

                           Compensation                  20% Deferral         5% Match                             

January                $10,000                                 $2,000                   $500 

February              $10,000                                 $2,000                   $500 

March                   $10,000                                 $2,000                   $500 

April                      $10,000                                 $2,000                   $500 

May                       $10,000                                 $2,000                   $500 

June                      $10,000                                 $2,000                   $500 

July                       $10,000                                 $2,000                   $500 

August                  $10,000                                 $2,000                   $500 

September            $10,000                                 $1,000                   $250 


December             $10,000                                 $0                           $0 

TOTAL                   $120,000                              $17,000                 $4,250  


Since the employee reaches the 402(g) limit of $17,000 (assuming she is NOT age 50 or older) in September, and thus her elective deferrals (and related matching contributions) cease. The total match for the year is $4,250, which is only a shade over 3.5% of pay, well short of the full match of 5% of pay. This occurs, since the executive reached her 402(g) elective deferral limit prior to the time when she would have received the full 5% match of her total compensation.    

How, do we address such a situation? First of all,  the employee should be advised of the issue and it should be suggested to her that  instead of deferring 20%, she should spread he deferrals more evenly throughout the year so that she does not reach the elective deferral limit prior to year end in future years. As to making the employee whole for 2012, that depends on the language of the plan document. Some documents, in their contribution section, permit a so-called “true-up” contribution that may be made after the close of the plan year specifically to make such effected employees whole. In this case, such contributions should be made accordingly. If not, and you wish to make such contributions, the plan will need to be amended. If you are uncertain as to whether your plan contains the necessary language, please check with the individual/entity who drafted the document.    

Also, note that another type of match maximization problem can occur with individuals who earn in excess of the 401(a) compensation limit ($250,000 in 2012), who might reach their compensation limit prior to year end, at which time elective deferrals may continue be made, but employer matching contributions cease. It is for this reason that some plans include language that addresses this issue. If there are employees at your organization who earn in excess of the compensation limit, and you have a matching contribution, you should check your plan document language in this regard (and check with the document drafter if the language is unclear to you).  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.