2002 profit sharing "pre-funded" during the plan year -- how

[maverick]

Here's a good one:

During 2002, client pre-funds 2002 profit sharing to the tune of 50k. Instead of just parking the pre-fund $$ in the money market, it was invested in mutual funds offered by the plan. On 12/31/02 the pre-fund money is down to 40k. I'd appreciate comments about how other people have handled this.

My first reaction is that the participants don't have a right to the money until 12/31/02, so their p.s. allocations should add up to the 50k total. Okay, so the employer makes up the 10k of losses, how do you account for the 10k?

There are threads about other situations where the ER puts $$ in the plan to make participants whole (e.g., a deposit equal to surrender charges assessed when the employer changes fund companies), but I didn't see anything similar to this scenario. Thanks.

[david rigby]

1. Does the plan say anything about the timing of the contribution?

2. Sounds like negative earnings. Welcome to the 21st century.

[maverick]

Plan says $$ must be deposited by due date (incl. extension) of the firms's tax return.

I guess this situation is no different than funding a discretionary match throughout the year.

One other thing, if the pre-fund ends the year worth 10k (there are some years when funds have a positive return, right???), I don't think a participant would complain that his profit sharing allocation was $1,000, not 1k plus investment gain.

[Mike Preston]

Whether the participant would complain or not doesn't matter. Pax has it right. The participant statements show contributions which sum to $50k. It also shows earnings for the year which sum to negative $10,000.

However, the question is who gets the negative return.

In a typical balance forward plan it may just be that the negative return is allocated solely to those people who had balances at the beginning of the year.

If this is a new plan, and the plan has that language, you have to punt. At least it is still football season.

So, what does the document say?