By Jeff Chang
Most public agency defined contribution plan sponsors can easily recall the current amount being contributed to participants in their plan; however, not all can tell you “how” the contribution is being allocated amongst the participants. The distinction between a “contribution” and an “allocation” is very important at the participant level because it doesn’t matter how much an employer is contributing to its plan, if a participant is not eligible for an allocation (or share) of that contribution.
In the simplest terms, a retirement plan contribution is the amount that an employer (and employees) pay into a retirement plan. In many money purchase pension plans, the employer contribution might be described as a “[specified] percentage of each participant’s compensation” or a “[specified] dollar amount per participant.” In a discretionary defined contribution plan, the employer’s contribution might be: “the amount determined for the year by the employer.” Typically, this determination will be documented by an appropriate resolution of the employer’s governing body.
Once the employer’s contribution obligation for the plan year is determined, you have some idea of the amount of money going into the plan. However, “which participants” will actually have a share of the contributed monies credited to their accounts is a matter of “allocation” of the contribution. For example, an agency may be committed to contributing 25% of each participant’s base pay into its plan. That contribution commitment does not mean that each and every participant will receive a share/allocation of that contribution. There are two important aspects of plan allocation (and the related contributions) that need to be addressed in your plan document:
- The timing of the contributions and allocations. The vast majority of public agency defined contribution plans (i.e., 457(b), 401(a), and 403(b)) are participant-directed – meaning participants are given control over how their accounts will be invested. Because each participant-directed account is subject to unique investment direction, it must be accounted for separately. If an employer is making its employer contributions to various participant-directed accounts on a payroll-by-payroll basis, that means the employer contribution is being split or allocated among the participants each payroll. While this approach is very common, and popular among employees, it is not consistent with many of the “allocation conditions” that are available, or used, in various plan designs (e.g., requiring completion of 1,000 hours of service; requiring employment on the last day of the plan year). If your plan contains any allocation conditions, you should check on whether contributions are being made to the plan on a payroll-by-payroll basis.
- Proper documentation of allocation conditions. Because governmental retirement plans generally are not subject to the nondiscrimination requirements that apply to private sector plans, they can contain allocation conditions without concern for being discriminatory. Unfortunately, we often find these conditions in the wrong place – tucked away in individual MOUs rather than clearly spelled out in the plan document. Due to the tendencies of many agencies to focus on their MOU language, but not to carry over critical plan terms into the plan documents themselves, we have had to address these compliance problems on a number of occasions under EPCRS.
As mentioned in earlier posts, one of the cardinal rules of retirement plan administration and compliance is “following the terms of the plan.” If your plan does not contain the necessary language or specificity to know which employees will receive a share of the employer contributions, or when the employer contribution will be credited to their accounts, the plan likely has a significant documentation or compliance problem.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.