If you sponsor a 401(k) plan that temporarily Âdiscontinued matching contributions, know your options if you’re thinking about restarting them. If you reinstate 401(k) matching in 2010 and your plan uses the prior-year method for non-discrimination testing of matching contributions, watch out for an unintended pitfall.
Under the prior-year method, you must base your rate of matching contributions for highly compensated employees in any current year on the rate you used for your non-highly compensated employees in the prior year. So you cannot make matching contributions for your highly compensated employees this year if you made no matching contributions for non-highly compensated employees last year.
You can avoid this problem if you amend the plan to switch from the prior-year testing method to the current-year method. This will change your rate of current year matching contributions for highly compensated employees to the rate you use this same year for non-highly compensated employees. However, if you do this, you will have to continue using the current-year method for at least five plan years before you can change back to the prior-year method.
Note that your method of nondiscrimination testing for matching contributionsuudoes not have to be the same as for testing your 401(k) contributions. You can use the current-year method for one and the prior-year method for the other.