Allocation Requirements

[Fred Payne]

Many plans we see allocate contributions periodically during the year even though there is a last day of the year employment requirement. When a participant is terminated, we have to back out YTD contributions--a major hassle.

We've gotten some of the sponsors to contribute to an unallocated account to accomodate their cash flow needs, from which we allocate to participants after t6he close of the year. But some sponsors insist on allocating to participants and backing out contributions if necessary.

Aside from the HR mess it causes when money is taken from a participant, can anyone venture an opinion on the propriety of the practice? Isn't such a practice inconsistent with the terms of the document? How big a compliance problem might this cause?

[Guest RSF]

I have had the same problem in the past and solved it by either using a standardized document, thereby eliminating the last day requirement and 1000 hours or using a safe harbor 401(k) plan with a comparability profit sharing allocation at the end of the year.

[jpod]

I've always had a problem with making "contingent" periodic allocations during the year when the plan has a last day rule, but the IRS seems to look the other way at this, at least for matching contributions.

Regrettably, this practice is common, and it is a big pain in the neck to have to back our YTD contributions, and earnings too: you can't let the participant have the earnings if he/she's not entitled to the contributions which gave rise to the earnings in the first place.

And, what if there are losses? Can you charge the participant with the losses if he is forfeiting the contribution due to the last day rule? I don't think so.

Typically, the only reason for a match is to encourage people to contribute. If you feel that you need to make periodic matching contributions to encourage people to contribute at the level you'd like them to contribute, then you should eliminate the last day rule. At least, that is what I tell my clients.

[Fred Payne]

I have dozens of reasons why the Plan Sponsor should change its practice regarding the allocations, but many--particularly if doctors--insist they get their money allocated right away so they can get it into the market. And it isn;t just the match; it's often the nonelective contributions. My primary concern is if the IRS would object.