Eligibility for discretionary PS contribution

[JDuns]

May a plan be drafted providing a discretionary profit sharing contribution to all employees who (a) are employed on the last day of the prior plan year, (b) are credited with at least 1,000 hours in the prior plan year, and © are still employed on the "credit date" which would be approximately two months into the current plan year?

It is clear that a plan can require both a last day and 1,000 hours requirement (1.401(a)(4)-2(b)(4)(iii)). However, I cannot find any authority permitting or prohibiting the "still employed on a second date" requirement. I believe that this would not be permitted but I need some authority to back me up.

Any help out there?

[Tom Poje]

My sense would be no, based on DOL 2530.200(b)-1(b)

such a plan, may..an individual who has separated from service before the date on which the er's contributions to the plan or forfeitures are allocated among the accounts or before the last day of the vesting computation period....

[Guest asire2002]

Tom, I read the regulation you cited, but am curious what in it leads you to conclude that a post-year-end employment requirement is not permissible?

I do not know the answer to the original question, but we were recently asked to add a similar provision to a plan. We submitted the plan to the IRS for a letter because we were uncertain whether such a provision was permissible. My own personal view is that yes, it is. The question in my mind was when the contributions would be deductible and (since it was a match in our case) how the match (which was based on prior year deferrals but allocated only to persons who were employed as of a date after the end of that year) would be treated for ACP, 415 and coverage testing purposes.

[Tom Poje]

As I said, my sense would be no, and that item from the DOL is the best I can come up with at the moment. I didn't think it mattered exactly when the deposit was made it was still 'deemed' to have been made on the last day of the plan year. Your question on deductibility I believe is easier because, at least as I understand it, a contribution is deductible either for the year it was made (if by tax time) or in the year made.

Without a cite, I would have a problem with, at least it looks to me, having a 14 month requirement for the contribution. I would think 12 month is the longest period. Now, if the credit date ran 3/1-2/28, but comp was based on the calendar year, I certainly wouldn't have a problem with - I have seen that done.

[Guest asire2002]

On the deductibility issue, clearly it is deductible for the year of actual contribution, but I don't think it is deductible for the prior year, even if it relates to compensation paid in that prior year and is made by the due date for the prior year's return, because it is contingent on an event which occurs after the end of that year, i.e., employment on a later date.