Comingling (& no accounting for separate) sources?

[John A]

As long as a plan does not provide for hardship withdrawals, does not provide for different distribution options depending on source, and the plan accounts for deferrals long enough to do annual testing each year:

Is there any reason a plan has to keep track of how much of a participant's account balance is from deferrals versus how much is from employer contributions? Why?

[Guest Jim Kais]

1. Ask yourself if a vesting schedule applies to the employer source(s). Obviously, you would want to account for sources of money that are not immediate and 100% vested.

2. As a participant, wouldn't you prefer an itemization of contributions on your statement - even if it is an annual one?

3. I would make sure that Rollovers are not aggregated as well. You will have to track related vs. unrelated rollovers for top-heavy testing.

4. Is their a distribution hierarchy for loans and/or distributions as outlined in the plan document. If so, this may be a concern. This is not to say that their is a restriction, but just a set methodology for liquidating the accounts. If in-service w/d's are not permitted in the plan, then focus on loans.

5. What about the employer's tax deduction? Under the new tax law, employers can take a credit of 25% for employer contributions in the 2002 tax year. Plan on accounting for this as well.

6. Form 5500 Reporting

7. What about self correction, vcr, plan audits that may arise if this plan is audited and found to have miscalculated ER match or P/S contribs? Not likely, but a possibility. It would be advantageous to have source specific data to research if earnings have to be calculated, etc. due to a potential plan defect.

8. What if the client wanted to have a plan design call to discuss a Safe Harbor Plan or Automatic enrollment. It would be helpful to understand their historical cost relative to match or other basic contributions in order to make a sound recommendation by way of forecasting allocations. This is a stretch, but a possibility.

That's all I could think of for now. There is probably more.

[John A]

Thanks, Jim.

I do see reasons why it's a bad idea on your list, but not necessarily a reason it can't be done.

1. Both employer contributions and deferrals are 100% vested.

2. It is a participant in a self-directed account that is asking for the accounts to be commingled - does not want them tracked separately.

3. Good point. Rollovers need to be accounted for.

4. Good thought - don't believe there is any hierarchy.

5. True, but still only applies to the year, not to the account balance.

6. Affected by the year, but how is the 5500 affected by the account balance?

7. Self-correction might be able to be done despite not tracking the sources separately, but I agree that there could be situations where the separate accounting would make it easier.

8. Records for each year would be available from the testing documentation, but I don't see where a division of the account balance would be necessary.

I believe it is much better to keep track of the sources separately, but I'm still struggling with why the sources would have to be kept separate in all situations. I'd like to tell the participant that the sources must be accounted for separately, but I still don't have a definite reason why this is required.

[Guest Jim Kais]

Aha! The old self direct brokerage account. I am curious to know why the participant wants their account tracked separately.

I suppose you are correct. If all sources are 100% vested and testing is completed accurately, I guess it is ok. I would just check the plan document on the loan hierarchy issue and approach him/her on the top heavy testing concerns (you still have to prove that a plan is not top heavy even if their is a small chance of achieving TH status (on the 5500 upon random audit - I've seen it happen)). Also, if you are trying to dissuade the participant/client from moving forward in this fashion - alerting them to possible plan (operational) defects may be the best way to get their attention (ala the loan hierarchy issue). Finally, if the plan sponsor ever decides to allow hardships (or if they are acquired and merged into a successor plan with in-serv w/d's), it may be more difficult to establish a basis.

I have converted plans with self-directed accounts that maintained commingled monies and was required to break those out for "clean accounting" moving forward. A great task to say the least.

I'm sure we are missing a more important point, but commingling sources has been done before in a self-directed brokerage environment. Overall, seems like a poor choice from a plan admin. perspective.

Good luck.

[John A]

JK - Misguided belief that tracking assets together rather than accounting separately will result in less paperwork.

[david rigby]

Interesting discussion.

Another possible reason for tracking of different types of money is to allow for future flexibility. However remote you might consider it now, there may be a future desire for hardship withdrawals (for example).

[John A]

pax, that assumes that the employer might change the plan in the future or there might be a change in the law that would make it beneficial to have the sources tracked separately, and we all know the law never changes and plan sponsors never amend their plans.

[Richard Anderson]

Most documents specify seperate accounting. Would'nt not doing so be a failure to follow the terms of the document.

[Guest RBlaine]

Our plan document defines various "Accounts" that will be used to hold assets. There are about 6 accounts defined. I dont remember another plan document that does NOT define accounts like this. Ive only mostly dealt with prototypes though.

I would say that not tracking the money separately would violate this provision.

Having tried to take over a plan that did not track money separately, I can tell you that it is a nightmare.

[Guest GregSelf]

What about an audit trail??

[R. Butler]

Doesn't 1.401(k)-1(e)(3) require separate accounting of elective contributions?