Prefunding match subject to accrual rules

[Guest Jennifer Reid]

The plan requires 1,000 hours of service and last day employment to accrue a match, but prefunds the match per payroll period throughout the year, allocates to individual accounts in a source labeled "Suspense Match", the participants direct the investment of this source and see it on their quarterly statements. After the end of the year, if a participant has met the accrual requirements, the "Suspense Match" balance is moved to the regular match source. If he does not, the "Suspense Match" is "forfeited" and used to reduce future matching contributions. I'd like input from both sides of the fence on this one - is this an acceptable practice or not. The document is a prototype that doesn't address this at all. My position is that the amount "forfeited" isn't really a forfeiture at all because it is not really part of the "accrued" balance and because it is not accrued yet it probably shouldn't be allocated for participant direct investment. I think a better solution to an employer's wish to prefund the match while maintaining accrual requirements would be to allocate the match throughout the year to a separate account (invested at the direction of the employer, admittedly without 404© protection, whatever that's worth) and then allocate to the participants who have accrued a match benefit at year end. Am I being too rigid on this? I've been told that the practice described above is fairly common in the industry, so I'd like to hear what others think.

[actuarysmith]

This may not specifically address your exact question - but we try to advise clients that wish to "match as you go" to avoid the 1,000 hour last day requirement for this very reason.

Once you explain that the vesting schedule still applies, and you explain the difficulty in the calculations for participants who terminate, most often they will agree to forego the EOY 1,000 HRs , etc. routine. (This has been my experience).

As far as whether or not your "forfeited" match is really forfeited or not - I guess I have not focused on this before. My opinion (given free - and worth as much!) is that since they have not accrued the right to the match in the year of termination, that it is NOT a forfeiture. I suppose that means that you would have to deal with it like an advance employer contribution. It may or may not be deductible right away. Rather than allocating it as according to the forfeiture protocol in the document, I would have the employer "short" a future match and use it up.

[Guest Jennifer Reid]

The plan sponsor won't change because two prior providers have done it that way and never said there was anything wrong with it, so the sponsor doesn't think it's necessary. We're trying to do some due diligence, but are running up against the old "we've always done it that way" response.

[actuarysmith]

Depending upon how the document is written, you may get the same result either way mathematically. For example, if forfeitures reduce the match, I think you get the same result as if you treated the contributions as new money to the plan.

If the forfeitures are allocated in addition to the emloyer contribution, then I think you get a different result.

If you are trying to "prove" a point to the sponsor - I would probably try the following line of reasoning.

1. a forfeiture is defined as an amount that has been accrued or earned by the employee, except for the completion of the years of service required by the vesting schedule.

2. a participant terminating employement in the current year, has not accrued the right to the employer contribution in the current year. Therefore it is not technically part of their balance upon which the vesting schedule would apply.

3. These "pre-allocated" matching contributions should be treated as advance employer contributions to be applied against a future contribution, not allocated as forfeitures.

I am sure we have all toiled against the "we've always done it that way" mentality. I always try to get the client to focus on how we should do it from now on, and not worry about how it has been done. (unless it could disqualify the plan upon audit, of course).

Does anyone else out there have an opinion on this? Are we splitting hairs? Does it really matter which way you do it??

[IRC401]

Assuming that Rev Rul 80-155 is still valid, any amounts contributed by the employer during the plan year must be allocated as of date in the plan year. There may not be any amounts left over to be allocated in the following year. Therefore, the plan may be in violation of the definitely determinable requirement.

If the employee does not have 1000 hours, then there is no basis for an allocation under the plan. Any earnings on the advance allocation would themselves be allocations subject to IRC 415 and 401(a)(4), and it appears that the plan was being administered inconsistently with the plan document. I suspect that the employer needs to start running (a)(4) general tests.

I don't know what your scope of services is, but I would be careful about representing that the plan is in compliance with IRS rules.