Separate Accounting by source

[Jim Chad]

A CPA wants me to take over a 401(k) Plan where each person has an individual brokerage account. The only contributions are Deferral and SHNEC. Since there is no vesting and no Hardship withdrawals allowed, CPA was thinking we don’t need to do annual statements showing the value of each type of money.

I keep thinking there is some regulation that requires that gains must be allocated by source at least annually?

This is a Corbel Prototype and I have not been able to find it in there.

Does anyone know of any requirement like this?

If not, would you consider it prudent in case of future law change?

[Below Ground]

I was pretty certain that a statements showing source positions would be required. I just did a search of the pension answer book series (all pension related books) and found nothing on this. Basically it seems that the required annual statement content must include total and vested benefit. Looks like you would do that without a source specific division. Also, operationally it looks like you have no issues, under the current design (hardship, etc...).

Even so, I think a source specific account would be prudent. I have a gut feeling that somewhere down the road you will find it is needed. The first thing that comes to mind is a change to design, like adding Hardship or some other issue that needed source accounting. Having done this type of "valuation accounting" for many years and on many plans, I can tell you that it is not that hard to do. How you address the time weighting is really the only area that special care is needed (beyond what is normally done). You may wish to check out how earnings are allocated under the Plan. Hope this helps and Good luck!

[A Shot in the Dark]

Accounting by source is absoutely needed, regardless of any reporting to participants.

At the very least source accounting creates an audit trail by which employer contributions can be accounted for regarding tax deductibility, corporate tax deductions versus deposits, etc.

[BG5150]

What would the participants have to say about not having the sources broken out? How could they reconcile what they had taken out of their paychecks with what went into the account?

[E as in ERISA]

The separate accounting rule is in 1.401(k)-1(e)(3). If you don't apply it, the employer contribution is subject to 401(k) vesting and distribution rules. The CPA is saying that they're the same already?