Can employer prepay a contribution? Idea: put it into a segregated emp

[Guest LisaA]

Can an employer prepay an employer contribution, put it into an employee account (not a pooled account, a segregated account under the employee's name) and then withdraw that amount if it comes to pass that the amployee is not eligible to receive the contribution (due to last day rule. etc.)? The employer will not take the money back out of the plan, they plan to move it around to other employees who will be due the employer contribution in question.

If the plan doc says that only employees with 500 hours get a contribution, isnt it a defect to put money in an employees account at the beginning of the year?

cites would be helpful if anyone has any

thanks a lot

[mbozek]

Two Q:

Q1. Is this contribution showing up in the employees benefit statement as an accrued benefit beore the svc is completed? If so what disclaimers and caveats which permit withdrawal of the funds.

Q2. What does the plan say about when a contribution is made to participant's account. Presumably a contribution will be made only for eligible ee who meet the svc requirements. If so then no allocation should be made before the ee meets the requirements. This is about plan design not cites to authority. The sponsor should have looked at the plan terms before taking this action.

[Guest LisaA]

This is, for instance, a 2003 contribution which will only show up on a statement at 12.31.03

statements are only annual

the doc says that an employee must have worked 500 hours. but, the contribution is being deposited before the employee has worked 500 hours, with the understanding (between the trustees) that it will be withdrawn and used to pay the rest of the benefit at the end of the year.

In other words, this is a pension contribution. The MPP requires 500 hours. Part of the benefit is prepaid early in the year. The rest is paid at the end, anyone who is not due the benefit is withdrawn and "shuffled" to other employees who are due the benefit.

I guess the question is...is this benefit "accrued" just becasue it is deposited? Or, Can it be deposited before it is accrued?

[jane123]

Isn’t this a SIMPLE excess nondeductible contribution which should be reallocated towards the following year’ contribution until used up?

Don’t get caught up in the fact that the contribution was made to one individual’s account- fact is , it was made to the ‘plan’ and is an excess to the plan

[Guest LisaA]

Nondeductible? Why so ?

Sorry if i am missing the big picture.

[mbozek]

The benefit accrues as provided under the terms of the plan. Not when it is deposited in the account. If the ee doesnt work the necessary hours then no accrual occurs. Isnt this how the plan is written? Why cant the contributions be held in a suspense account until the ee works 500 hrs?

[Guest LisaA]

I realize the problem...that the benefit does not accrue until the plan says it does. But, this is a group of doctors and you know how it is with groups of docs who want to do what they want to do.....

they want the money invested as early as possible, which is why they all want it invested into their segregated accounts as they prepay.

I am not going to talk them out of prepaying, or talk them into putting it into a general account until they accrue the benefit.

the attitude i get is "why cant we do this. where is it written that we cant. what is the big deal...if the person hasnt accrued the benefit and they terminate employment, then we can pull the money out and use it to pay down the employer contribution owed at the end of the year to those who do accrue it. where is it written that we cant do this. why isnt it the same as if a person has a forfeiture and we pull that money out when they terminate employment and reallocate that?"

I have no idea what to say. i can think of a million reasons why they shouldnt do this..why can an employee self direct a contribution they have not accrued yet...what if the fund the prepayment is invested in goes down and the prepayment loses money...or earns? how to i calculate earnings? but it is all theory

[mbozek]

The reason why they should not do it is if the plan document does not permit such actions since the plan must be administered in accordance with its terms. They might be able to finesse what they are doing if the plan had provisons that allow for such actions but I doubt that there is such language. The problem with doctors is that they do not want to abide by the rules because they believe that they should be allowed to do what they want with their money.

[Larry M]

If the plan sponsors (the "docs" in this case) want to be able to contribute money to the plan before year end, and if they want the money allocated to each individual's account; and if they want the individuals to have the right to direct the investment of the money; then amend the plan to allow this.

Individuals terminating employment before their accounts are fully vested, will forfeit the non-vested amounts and those amounts reallocated to the remaining participants.

If the doctors don't want to abide by the plan document, especially after you describe the penalties involved in not doing so, then run, do not walk, to the nearest "I resign from this account" letter.