Profit Sharing contribution allocation

[Guest rustymonty]

I have a client who has a new comparability profit sharing plan and files based on a calendar year. The filing for 2004 is on extension and the company wishes to change the allocation percentages for all participants (HCE and NHCE) for the 2004 plan year. The employer made quarterly PS contributions throughout the year and has yet to make the 4th quarter contribution. Can the employer change the allocation percentages and then reallocate contributions that were already deposited into participant accounts throughout the year to reflect this new allocation formula?

[austin3515]

Presumably your document provides for an annual allocation, so on the one hand, you could argue that the final allocation couldn't possibly have been determined. If the doc. provides for quarterly allocations than you're sol...

But on the otherhand, you could argue that there would be a prohibitted cut-back because you allocated the contribution as of an interim date.

I think the argument for the former is strongest, but that doesn't mean a disgruntled employee couldn't take the latter position.

for what it's worth, interim contriubtions on annual formulas should be outlawed. No good can come from them...

[Tom Poje]

in addition, consider the following:

group 1 owners

group 2 rank and file

group 1 was provided 20% throughout the year

group 2 was provided 5% throughout the year

group 2 is now bumped up to 7% over the whole year

you have a possible BRF in the fact the HCEs were given a chance to earn at a greater rate throughout the year.

[mbozek]

The date that the contributions were made to the plan is not relevant- The issue is When were the contributions allocated to the participant's accounts under the plan? Once contributions are allocated to the account they cannot be removed under the cutback rule. While the IRS position is that the allocation formula cannot be changed after the close of the year, there is a ct case which holds that contributions are not subject to the cutback rule until they are allocated to participants accounts under the terms of the plan.

[austin3515]

I think it's relevant to note that issue ended up in court, which most sponsors should try to avoid! But for what it's worth I agree...