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pre-funding and 415


Bri
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I'm sure someone will know this of the top of their head - my EOB is on site in the office, and I am most definitely not.

Sponsor deposits 100,000 early for 2020 to a "pre-allocation account" with a well known recordkeeper.  That 100,000 then grows to 105,000 by the time it ends up being allocated the following January. 

For 415 purposes, is an individual limited to 57,000 as of the date it's allocated?  Or can he get 57,000 plus 5% for his share of the earnings?  Or 57,000 plus only the earnings after December 31, the plan's actual allocation date for contributions?

And the similar question if the 100,000 drops to 95,000 by the time it's allocated....("Hey, favored employee, we'll max you out!  Oops, we invested some of that for you early and lost you a chunk of it.")

Thanks --bri

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Hey I'm just guessing, but I'll bet your plan document defines how contributions are allocated, and then it defines how earnings are allocated.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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It would seem that gains or losses on the contribution from the time it is deposited in the plan to the time it is allocated to participants accounts should be allocated at that time.. But as David Rigby points out, it's probably spelled out in the Plan document.

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ha.   I basically have this:

"Suspense accounts. The Plan’s investment procedures also may provide for special valuation procedures for suspense accounts that are properly established under the Plan."

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The amount ALLOCATED is the 415 amount.  The participant doesn't have it until then, so the $105k is what counts for 415 purpose.

We (a large, well known recordkeeper) STRONGLY discourage this for that reason, and about 60 others, including 1) the plan probably doesn't contain a provision for it; 2) the IRS wouldn't qualify a plan that contains such a provision (according to them, there are limited uses for "unallocated suspense accounts" and the client's budget isn't one of them; and 3) what happens if you have allocation conditions not met....

BTW, this has become a big issue right now, as employers are trying to shelter PPP money to qualify for loan forgiveness.  No opinion on if that works or it's "fraud," but not our call.

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3 hours ago, MoJo said:

The amount ALLOCATED is the 415 amount.  The participant doesn't have it until then, so the $105k is what counts for 415 purpose.

We (a large, well known recordkeeper) STRONGLY discourage this for that reason, and about 60 others, including 1) the plan probably doesn't contain a provision for it; 2) the IRS wouldn't qualify a plan that contains such a provision (according to them, there are limited uses for "unallocated suspense accounts" and the client's budget isn't one of them; and 3) what happens if you have allocation conditions not met....

BTW, this has become a big issue right now, as employers are trying to shelter PPP money to qualify for loan forgiveness.  No opinion on if that works or it's "fraud," but not our call.

And it all goes away with a trustee directed pooled plan; we have lots of clients who put their money in during the year, sometimes in January, to be allocated at year end.  The earnings are just earnings of the assets,  never 415 allocations.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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6 minutes ago, Larry Starr said:

And it all goes away with a trustee directed pooled plan; we have lots of clients who put their money in during the year, sometimes in January, to be allocated at year end.  The earnings are just earnings of the assets,  never 415 allocations.

Plus the benefits of professional management!

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On 5/1/2020 at 1:24 PM, MoJo said:

The amount ALLOCATED is the 415 amount.  The participant doesn't have it until then, so the $105k is what counts for 415 purpose.

We (a large, well known recordkeeper) STRONGLY discourage this for that reason, and about 60 others, including 1) the plan probably doesn't contain a provision for it; 2) the IRS wouldn't qualify a plan that contains such a provision (according to them, there are limited uses for "unallocated suspense accounts" and the client's budget isn't one of them; and 3) what happens if you have allocation conditions not met....

BTW, this has become a big issue right now, as employers are trying to shelter PPP money to qualify for loan forgiveness.  No opinion on if that works or it's "fraud," but not our call.

Maybe I misunderstand what you are saying but I disagree.  Who cares where the money was held and when it was moved to participant accounts?  Let's say for some reason you had a self-directed platform as well as a pooled account.  If you throw $100,000 into the pooled account, that is the amount that is allocated (maybe not right away) as a contribution, and the earnings are just that, earnings, and allocated as such.  The pooled account could be transferred to the self-directed accounts at some later date.  I see no difference between a separate pooled account and a suspense or holding account.

Ed Snyder

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3 minutes ago, Bird said:

Maybe I misunderstand what you are saying but I disagree.  Who cares where the money was held and when it was moved to participant accounts?  Let's say for some reason you had a self-directed platform as well as a pooled account.  If you throw $100,000 into the pooled account, that is the amount that is allocated (maybe not right away) as a contribution, and the earnings are just that, earnings, and allocated as such.  The pooled account could be transferred to the self-directed accounts at some later date.  I see no difference between a separate pooled account and a suspense or holding account.

RTFD (I've *never* seen a document that allows an unallocated suspense account of this type - and the IRS doesn't likes these) , and google "definitely determinable benefit" formula....  At the time the "dollar goes in" it's allocation must be set.  Earnings and allocation conditions violate this.

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2 minutes ago, MoJo said:

RTFD, and google "definitely determinable benefit" formula....

$100K is allocated according to the terms of the document and $5K is allocated as earnings.  That's what my FD says.

Ed Snyder

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2 minutes ago, Bird said:

$100K is allocated according to the terms of the document and $5K is allocated as earnings.  That's what my FD says.

I respectfully disagree - *UNLESS* you consider it allocated at the time contributed.  Then, well, it's "allocated" and not unallocated - in which case, you've got a fiduciary problem in it probably not being invested appropriately.  Bad idea - and if the IRS catches it, real bad idea.

 

I have never found a client who could give me a good reason for doing this - other than they can't budget (solvable with a savings account or they are attempting to hide money (something clients are trying to do right now with PPP money).

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1 minute ago, MoJo said:

I respectfully disagree - *UNLESS* you consider it allocated at the time contributed.  Then, well, it's "allocated" and not unallocated - in which case, you've got a fiduciary problem in it probably not being invested appropriately.  Bad idea - and if the IRS catches it, real bad idea.

But that's exactly how a pooled account works.  Are you saying the employer would deduct $100K and allocate $105K as a contribution?  Isn't that problematic?  I'm having a really hard time wrapping my head around this.  Take the inverse where they lost money - deduct $100K and allocate $95K?  

Ed Snyder

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Just now, Bird said:

But that's exactly how a pooled account works.  Are you saying the employer would deduct $100K and allocate $105K as a contribution?  Isn't that problematic?  I'm having a really hard time wrapping my head around this.  Take the inverse where they lost money - deduct $100K and allocate $95K?  

I think you misunderstand a "pooled" account.  It's still "allocated" to participants even though they don't control the investments.  What is being discussed here is a suspense account that is unallocated, much like a forfeiture account - which is unallocated (i.e. no participant knows what their interest is at any given time).  Forfeitures are allowed because of vesting schedules - and the plan document.  Other unallocated suspense accounts generally are NOT in the plan document.  If the plan has a pooled account - you can still "definitely determine" the benefits of each and every participant from the moment it is contributed to the plan.  With an :unallocated" account, you can't.  BIG difference.

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3 hours ago, MoJo said:

If the plan has a pooled account - you can still "definitely determine" the benefits of each and every participant from the moment it is contributed to the plan.  

Actually you can't.  See what Larry said, below; my emphasis. Definitely determinable is a red herring.  What about the deduction/allocation issue I raised?

On 5/1/2020 at 5:14 PM, Larry Starr said:

And it all goes away with a trustee directed pooled plan; we have lots of clients who put their money in during the year, sometimes in January, to be allocated at year end.  The earnings are just earnings of the assets,  never 415 allocations.

 

Ed Snyder

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3 minutes ago, Bird said:

Actually you can't.  See what Larry said, below; my emphasis. Definitely determinable is a red herring.  What about the deduction/allocation issue I raised?

 

Then it's *not* a pooled account.  If it's unallocated, it's not allowed.  Definitely determinable is not a red herring - it's the "law."  Sorry - but we're going to have to agree to disagree here.  I deal with about 5500 plans these days, I have a little over 100 that are balance forward, about 250 with "pooled accounts" and NOT ONE has an "unallocated account where I can't tell from the plan records exactly where every dollar is allocated - but for the forfeiture account - at all times.

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Have to say that I'm with Bird on this topic.  Some of the confusion is brought about by loose use of the phrase "suspense account".  Yes, the IRS doesn't like them.  But a deposit in or for year X that is allocated at the end of year X is NOT a "suspense account".  It just isn't.  Call it "money awaiting allocation" if you will

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1 hour ago, Mike Preston said:

Have to say that I'm with Bird on this topic.  Some of the confusion is brought about by loose use of the phrase "suspense account".  Yes, the IRS doesn't like them.  But a deposit in or for year X that is allocated at the end of year X is NOT a "suspense account".  It just isn't.  Call it "money awaiting allocation" if you will

I agree with Mike.  We had a plan where the recordkeeper called it a "Pre-funded Account"... that plan also had a *true* Forfeiture account.  Money in the Pre-funded Account was invested in money market or guaranteed interest fund, so the dollars contributed were available at the end of the year for allocation.  Interest gains were allocated to all participants.  Question we had was if the interest should be allocated only to participants who eventually get a share of the contributions, or all participants in the plan. But as others have said with pre-funding contributions, this practice was ended a couple of years ago... actually recordkeeper eventually didn't like the arrangement.

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4 hours ago, Bird said:

I'd like to agree to disagree but I can't fathom what you are saying.  If a pooled account has $1 deposited in January, you can tell me the allocation the minute it goes in?

Not instantaneously - but the process and formula is definite - and I can calculate it. PERIOD.  It is "allocated" the moment it hits the trust - albeit fo rhte math.  An "unallocated" fund is still subject to subsequent events for allocation (maybe allocation conditions, maybe other events).  The key is legal allocations vs. unallocated.  The former (while maybe not at my finger tips is CERTAIN in its allocation.  The latter is simply parking money somewhere, and isn't permitted.

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3 hours ago, Mike Preston said:

Have to say that I'm with Bird on this topic.  Some of the confusion is brought about by loose use of the phrase "suspense account".  Yes, the IRS doesn't like them.  But a deposit in or for year X that is allocated at the end of year X is NOT a "suspense account".  It just isn't.  Call it "money awaiting allocation" if you will

Yes - if it isn't "allocated" it is by definition a "suspense" account - or in other words, "unallocated."

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1 hour ago, chc93 said:

I agree with Mike.  We had a plan where the recordkeeper called it a "Pre-funded Account"... that plan also had a *true* Forfeiture account.  Money in the Pre-funded Account was invested in money market or guaranteed interest fund, so the dollars contributed were available at the end of the year for allocation.  Interest gains were allocated to all participants.  Question we had was if the interest should be allocated only to participants who eventually get a share of the contributions, or all participants in the plan. But as others have said with pre-funding contributions, this practice was ended a couple of years ago... actually recordkeeper eventually didn't like the arrangement.

The difference here is that what some do, is irrelevant.  It isn't technically allowed.  Does it happen?  Yep.  It's still a violation of definitely determinable rules.

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12 minutes ago, MoJo said:

The difference here is that what some do, is irrelevant.  It isn't technically allowed.  Does it happen?  Yep.  It's still a violation of definitely determinable rules.

We will just have to agree to disagree.  Good thing I'm right and you are wrong. :-)

There is no way that any of what MoJo is saying is correct.

But on the off chance that there is no such thing as a balance forward plan that is qualified, I suppose this is about the right time to ask for a citation. Betcha one can't be found.

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9 hours ago, MoJo said:

I think you misunderstand a "pooled" account.  It's still "allocated" to participants even though they don't control the investments.  What is being discussed here is a suspense account that is unallocated, much like a forfeiture account - which is unallocated (i.e. no participant knows what their interest is at any given time).  Forfeitures are allowed because of vesting schedules - and the plan document.  Other unallocated suspense accounts generally are NOT in the plan document.  If the plan has a pooled account - you can still "definitely determine" the benefits of each and every participant from the moment it is contributed to the plan.  With an :unallocated" account, you can't.  BIG difference.

MoJo, safe to say you misunderstand our discussion.  A pooled plan is where the participants have no control over the investments; trustees make the decisions for all the money and all participants have the same rate of return. The whole plan is pooled, not just one pooled account in a participant directed account.  And of course, you CANNOT "definitely determine" the benefits of each and every participant from the moment it is contributed to the plan, because the allocation to participant accounts takes place at year end.  And, the allocation almost always includes funds not yet contributed, because a pooled, trustee directed plan is almost always reported on an accrued basis, so contributions that are made after the plan year FOR the plan year are shown in the year end balances (even though the money might not even be in the plan yet).  The plan as an "accrued contribution" on the books.  Hope that helps.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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2 hours ago, MoJo said:

Yes - if it isn't "allocated" it is by definition a "suspense" account - or in other words, "unallocated."

You are getting hung up on semantics.  Money put into a trustee directed plan early in the year is not yet allocated since allocations are only done on the last day of the plan year.  If it is not allocated (yet), then it's unallocated. That is NOT a suspense account or a forfeiture account; it's just part of the natural order of things for a trustee directed pooled account. I would suggest this is not a situation where we can agree to disagree; your statement above is simply wrong, whether you recognize the difference or not, and no matter how many plans "you have".  FWIW.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I have not read all the above, but I think I am siding with Mojo. You could draft a plan that was basically one with individual investments to say that the employer may also contribute amounts to be held temporarily in a suspense account that shall be invested for the benefit of all participants and that will be allocated to participants with the gain, but not counting the gain for 415(c), but if you are using compensation or other participant facts that are not in existence at the time of the contribution, so that the amount could not be allocated when it is contributed even if you wanted to take the time to do it, it seems like it violates definitely determinable. In other words, if you contributed $100k as discretionary nonelective on June 1, 2020 and said that it would be allocated, when you got around to it, based on January through May 31 comp, then it would seem like even if you didn't actually allocate it until early 2021 administration, then as long as you did allocate it based on January 1 through May 31 comp, and allocated to everyone employed on May 31, that would work, but no one would do it that way and I think not doing it that way does not work.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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