prefunding profit sharing

[Guest Big Al]

I've got a daily val 401(k) Profit sharing plan with a 1000 hour requirement for a person to share in that year's profit sharing. I was always under the impression that if you have a 1000 hour requiremnt or a last day requirement that you could not fund INTO the participant's accounts DURING the year (i.e. put a litle in Jan, Feb etc...).

Recently, i was told that my views are too conservative.

Anyone have an opionion?

thanks

Alan

[Archimage]

I agree with you. You can't allocate it before they accrue it.

[Mike Preston]

Oh, I don't think there is any prohibition against depositing the monies into the account. Only with leaving them there if they end up not being entitled to them.

In other words, you can do it, but it is foolhardy to do so, because the pain of undoing such a contribution when it turns out that the individual in question is not entitled to the allocation is not usually worth the gain one gets from having the ability to allocate funds early in the year.

I have seen cases where this is done and unwinding allocations which need to be unwound is time consuming and expensive.

Some clients insist upon allocating funds to HCE's early in the year, though, and in such cases I've seen counsel demand that they similarly fund the NHCE's and then live with the pain associated with undoing that which must be undone.

And it is quite painful.

[Guest bostonborn]

what do you do with it if you have to pull it back out? do you put it into the forfeiture account? and then what do you deduct on the corporate return, the amount the employer deposited minus the amount which was allocated to participants? just wondering.

[Mike Preston]

You can't deduct more than what is allocated. Whether you have a forfeiture or not depends on plan terms. It is truly an exercise in discovering what pain can be. Earnings, losses, weighting.... all of which can come into play.

[Guest Pensions in Paradise]

If your client insists on funding the plan during the year, you may want to recommend that they amend the allocation conditions to reflect the funding frequency.