401(k) Safe Harbor Nonelective Contribution

[Guest TAG]

If an employer has elected to use the 3% safe harbor nonelective contribution and a participant terminates mid-year and wants a distribution as soon as possible, can the employer contribute 3% on this participant's behalf prior to year-end? Otherwise the participant will be cashed out but will still be entitled to the safe harbor contribution for the year. Seems impractical to have to cut a check to the participant at year end for the additional contribution.

Any thoughts?

[Tom Poje]

I have seen a number of cases in which the document says distributions occur after the year of termination, so make sure if these people can even be paid out at this point in time. - just tp prevent such a situation as you describe from happening.

I have also had to deal with cases in which once an individual has his account closed out, that is it, and it is a pain to get the additional amounts credited to the individual paid out. (The investment house simply won't touch the $) So I know how you feel.

Obviously a contribution can be made at anytime (you don't have to wait until after the end of the plan year), but you establish a possible dangerous practice by allocating a contribution to one individual over another. e.g. now this individual has the $ in his hand while others don't. certainly if the individual was an HCE you can see where this would lead.

Or, if the plan was a standardized document, and the ee you refer to has over 500 hours, then what are you going to do? If the company were to make an additional profit sharing contribution, then you would still have to cut an additional check. Again, not likely to happen but food for thought. In fact, suppose the plan you referred to was not a safe harbor. Would you pay him out an additional amount assuming the plan would make a for example a 5% contribution?

All that being said, and of course I could be wrong, I don't think you can't establish a policy like that...maybe get it in writing since the safe harbor contribution is required. well maybe, since now you have the option of saying 'we might make a safe harbor contribution.