Plan design question

[SteveH]

If a client is looking to give a more guaranteed contribution to their employees, what affect does writing into a profit sharing document that the contribution will be 10% of pay?

Typically you would just list it as discretionary and then allocate an amount that would equal 10% of pay. If the document actually dictated that the allocation would be 10% of pay, and then the client did not contribute 10% of pay what are the consequences? Are you in effect creating a Money Purchase Plan subject to minimum funding if you write in the 10% of pay?

You can ammend a plan within the couple months after the plan year, but when MPP were a little more common, we would tell employers that once someone worked the 1000 requirement they were entitled to the contribution. So you couldn't really change a MPP formula past mid year.

I am trying to determine the difference between a Profit Sharing plan with the contribution fomula written into the document and a Money Purchase Plan.

[jpod]

1. PS plans can be designed to avoid J&S requirements; MPP plans cannot.

2. PS plans not subject to minimum funding requirements and minimum fundnig excise tax; MPP plans are.

3. PS plans not subject to ERISA 204(h); MPP plans are.

4. Can't incorporate a cash or deferred feature into a MPP plan.

There may be more differences but these are off the top of the head.

You can have a PS plan with a fixed contribution formula. Just make sure that the plan says, somewhere, that it is a PS plan.

[SteveH]

I am just wondering from a contribution persepctive. For instance if the plan says that the allocation will be 15% of pay, but the employer doesn't have the money, what happens? Has the employer not deposited the required contribution and therefore has gotten the company into an excise tax situation?

[jpod]

PS Plan = no excise tax.

That doesn't mean that the employer does not have a past due obligation to the plan.

[david rigby]

Isn't this an employee communciation issue more than a plan design issue? If the sponsor wants to give more in a PS plan, do so, and tell the employees that is your goal. Putting it in the plan is not worth the bother.

[SteveH]

Perfect, thanks jpod.

[QDROphile]

Is the plan disqualified if says that the participant's account will get a 15% contributionand it does not (most plans state a time limit for contributions)? Failure to comply with plan terms is a disqualifying event. If the employer is supposed to contribute 15% and does not, is the "past due" obligation an extension of credit by the plan and therefore a prohibited transaction?