Monthly profit sharing allocations and last day provision

[Guest Gibson]

Plan sponsor funds and allocates its profit sharing contribution monthly. However, plan requires employment on last day as a condition for receiving an allocation. What are the pitfalls of which sponsor needs to be aware?

[Alf]

One that comes to mind quickly is that the IRS position is that it is not a "mistake of fact" or other circumstance that would allow the sponsor to take the contributions back, so you will have to have a method for using the contribution that plan year (apply it against last contribution of the year or expenses, or reallocate it).

[stephen]

Are the participants recieving statements showing these "temporarily allocated amounts"?

If they are it leads to a whole range of possible problems:

"You didn't pay me what it said on my statement."

Whoever is paying participants out could overpay them.

What happens to the earnings/losses associated with these deposits (especially if they are in segregated accounts).

By "overfunding" the Money Purchase plan you could have amounts deposited that cannot be applied and therefore cannot be deducted for the year.

[AndyH]

The sponsor should be aware that for the reasons mentioned by Alf and Stephen this approach is unworkable and is just a very bad idea.

The sponsor can either realize the advantages of pre-funding or the advantages of having a last day requirement, but should not use both.

The only way this works in my opinion is to put the money into a holding account and allocate it (and earnings) once the eligibility is known for certain.