Is an employer required to inform employees before the plan year begins if the employer is going to stop a discretionary match that has been given on an annual basis, each year for a number of years?
Rev. 03/09/07 E-mail Alert 2007-3

No. Although it may seem strange in this world of full disclosure, by definition a discretionary contribution allows an employer to make an annual decision about plan contributions and then inform the participants.

There is no legal requirement to give a notice when a discretionary matching contribution will not be made. Such contributions may be discontinued or modified without prior notification. However, many employers make the effort to inform their employees early to soften the blow to morale that such a lack of communication may cause. Thus, a discretionary matching contribution formula may be treated in the same manner as a discretionary profit sharing contribution.

However, the reality is that many employers follow a pattern of providing the same discretionary matching formula year-in and year-out. Although this makes it easy for the employees to understand what they can expect, this makes it more difficult for employers who wish to retain flexibility to not make such contributions -- even when based on changes in their financial position.

Some employers do inform their employees before the first day of the plan year that they will not contribute discretionary matching contributions in order to permit their employees to adjust the amount of their deferrals. However, this may not reflect general practice.

With a discretionary matching formula (or discretionary profit sharing contribution formula), there is no need to amend the plan document to discontinue a discretionary match.

A plan amendment would be required to remove a fixed matching formula that is written into a plan document, and employees must be informed of such an amendment through either a new SPD or Summary of Material Modifications.

It is important that the employer timely adopt a board resolution stating the decision to make a discretionary contribution and the allocation formula for any discretionary matching or profit sharing contribution. Generally, under Rev. Proc. 2005-66, this resolution should be adopted prior to the last day of the plan year for which such contribution will be made. In many cases, the employer does not actually determine their contribution amount until after its profitability for the year has been determined. It is permissible for the employer to include in such a resolution a statement that the formula will be used each subsequent year until there is a board resolution superseding the formula.

Bill Grossman, QPA