For many 401(k) plan sponsors, the calendar year brings familiar tasks: preparing Form 5500, updating notices, and communicating plan changes to participants. One requirement that has gained attention recently is the annual notice obligation tied to discretionary matching contributions under certain 401(k) plan designs.
What’s the Requirement?
Under the IRS’s current pre-approved plan document rules, plans that use a flexible discretionary matching contribution formula – where the employer may make a match, but the rate or period isn’t fixed in the plan document – must provide a written notice to participants summarizing the discretionary match for the prior plan year.
This obligation is part of addressing the IRS’s “definitely determinable benefit” rules and ensures participants understand how and when an employer’s matching contribution was allocated.
What Needs to Be in the Notice?
The annual notice should summarize the key details of the discretionary match that participants actually received, including:
- The formula or method used to determine the discretionary match (e.g., percentage of deferrals or flat dollar amount).
- The period(s) to which the match applied (such as plan year or pay period).
- When and how the discretionary contribution was funded.
This content generally mirrors the information the plan sponsor sends internally to the plan administrator or trustee but presented clearly for participants who received the match.
When Must the Notice Be Sent?
For plans with discretionary matches, the notice must be provided to participants who actually received an allocation of the discretionary match no later than 60 days after the final discretionary matching contribution for the plan year is made.
Because the timing depends on when the employer makes the last match contribution to the plan, sponsors should coordinate closely with payroll and recordkeeping teams to ensure compliance.
A Big Practical Note on Recordkeepers
Although this is a requirement tied to plan document language and IRS interpretation, many recordkeepers do not automatically send this discretionary match notice. Unlike standard annual notices (such as safe harbor or fee disclosures), which most providers include in their regular notice packages, the discretionary match notice is often not part of routine deliverables. As a result, plan sponsors may need to draft and send the notice themselves or work with their third-party administrator or advisor to prepare it. Waiting to assume the recordkeeper will send it can lead to missed deadlines and potential compliance issues.
Bottom Line
If your plan uses a flexible discretionary match, putting this annual notice on your compliance calendar is critical. It should clearly explain the formula and period used, go to affected participants within 60 days after the final match funding, and be sent even if your third-party recordkeeper doesn’t generate it automatically.
Connect with the Twelve Points team today to learn more about the new Annual Discretionary Match Notice requirement for 401(k) plans.