Prefunded profit sharing contribution

[Guest HeatherS]

An employer prefunded a partial profit sharing contribution for 2004. Is it ok to hold this in a "suspense account" until year end (and receive earnings) and then allocate? How would we treat this contribution? This contribution is for one participant specifically and we can't show this money in his account until year end or it would be discriminatory? We weren't sure how the IRS looks upon prefunded contributions and if there were any rules relating directly to this issue.

[Guest FormsRmylife]

Prefunding a contribution raises the issue of whether the contribution for 404 deduction limit and 415 limit purposes is the amount contributed or that amount plus investment return as of the proper allocation date.

[rcline46]

I see a failure to follow the document issue occuring very quickly - if the document says the person has to work 1,000 hours AND be there at end of year, then the money cannot be allocated until the person has satisfied the conditions.

Then the document will discuss how the contribution is to be allocated. Bet it does not say the plan sponsor decides who gets the contribution.

If you have an 'pooled' account (not one those 401k mutual fund accounts) I see nothing wrong with leaving the money in the plan. At year end you allocate the contribution. Any gains or losses would be allocated as part of the overall gains/losses.

If you have a participant directed plan, then I think you have a real problem holding the money in the plan. It fails the participant direction procedures in addition to failing the allocation problems above.

Can you say disqualified plan?