As a TPA, I have some clients that like to provide for Profit Sharing allocations, under Each in Own Class allocation formula, during the relevant plan year. After the year ends, we receive census data and prepare our cross-testing for allocations.
The question is, if a client contributes in excess of a minimum benefit that we calculate, would it be permitted to forfeit that money from the participant account? How about offsetting for future year contributions?
My thoughts are that this may violate the Exclusive Benefit Rule with some overlap on Anti-cutback. Essentially, once money is deposited to an employee account, it becomes a plan asset. Plan assets are for the Exclusive Benefit of employees and beneficiaries. Reasons to return plan assets need to fall into Mistake of Fact, Disallowance of Deduction, or Failure to initially qualify with the IRS.
To me, this boils down to, is this 'prefunding' considered a mistake of fact? I would argue that it is not because they did not violate terms of the plan and no clerical or mathematical mistake was made. The sponsor decided to fund based on preliminary numbers.
Interested to hear thoughts from others.
