Can Plans Have ‘Last-Day’ Requirements for True-Up Contributions?

Q: I read with great interest your Ask the Experts column on match maximization, which raised the possibility of plan sponsors providing a so-called “true-up” contribution for those who do not make deferrals evenly throughout the year and are thus shortchanged on their match. We currently do not provide a “true-up” on our match but are considering it, since many of our participants have been repeatedly shortchanged, despite our advising such participants of the issue.

However, we also have several participants who take total account distributions immediately upon termination of employment, so adding a true-up at that point would create issues with our plan recordkeeper. Could we have a “last-day” requirement for the true-up contribution under our non-safe harbor plan that would require that a participant be employed on the last day of the plan year in order to receive the allocation?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Yes: In general, you can have a “last-day” requirement for a true-up contribution. Of course, your plan document should contain language that specifically states that a participant is required to be employed on the last day of the plan year in order to receive the true-up allocation.

Note that this provision should be separate and distinct from any other “last-day” requirements that may be present in your plan in order to receive an employer contribution (as there are often exceptions to such requirements, such as termination on account of death, disability and/or retirement). Also, note that adding a “last-day” requirement for your true-up could raise nondiscrimination testing concerns, so be sure to discuss any changes with your plan counsel.

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.

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