Allocating Employer Contributions

[Guest Grumpy455]

A client has a profit sharing receivable of $100,000 for the plan year ending December 31, 2004. On February 1, 2005, the employer contributes $25,000 of the $100,000 receivable. The $25,000 is allocated to participant accounts pro rata based on the portion of the $100,000 receivable they are entitled to receive. The plan permits participant direction of profit sharing contributions. On April 10, 2005, the employer contributes the remainder of the $100,000 receivable (or the additional $75,000). The $75,000 is allocated to participant accounts pro rata based on the portion of the $100,000 receivable they are entitled to receive.

Participant A invested their portion of the $25,000 contribution (say $2,000) in such a way that on April 10, 2005, it is worth $2,100. Participant B invested their portion of the $25,000 contribution (say $1,500) in such a way that on April 10, 2005, it is worth $1,200.

Are partial employer deposits permitted? Participant A is upset because if the entire receivable had been deposited on February 1, 2005, she would have a larger account balance and Participant B is upset because if the entire receivable had been deposited on April 10, 2005, his account would be larger.

Also, is it possible for the employer to simply dump money into the plan, not allocate the money until the entire $100,000 receivable has been paid (under the facts in this case)? I recall reading somewhere that the IRS or DOL does not like unallocated contributions.

Thanks in advance for any comments/suggestions.

[JAY21]

The employer is under no obligation to fund the contribution in one lump sum. Many employers for budgeting purposes may fund in increments during the year and after the plan year end for the prior year. The participants have no legitimate gripe here.

The employer is only required to allocate the contributions yearly (unless plan document locks them into something more frequently) but to avoid any issues of unfairness on the timing of contributions to each participants accounts, they may wish to have a general account (unallocated) within the plan which serves as a temporary "clearing" account where deposits can be made and held temporarily until the proper "allocations" for each participant can be determined and the money then moved into the individual participant accounts simultaneously. This would be in contrast to say giving the first contribution installment ALL to one participant and then a few months later giving the next contribution installment ALL to a different participant. In this situation there's sure to be some employee griping although I still don't know that's there's a discrimination issue per se unless the one benefiting most vs. the one harmed most is a Highly Comp Employee and a Non-Highly Comp Employee. Still someone can always sue for anything so keeping it fair is best.

However, as far as your current 2004 scenario is concerned it looks fine to me.

[Bird]

I don't see any problem with what was done.

Nor do I see a problem with dumping money into an unallocated account and allocating it later.

[david rigby]

Does this conflict with plan provisions?