prefunding of profit sharing

[wsp]

I've got a client that wants to prefund their profit sharing monies. However, the principals want to be able to immediately direct their contributions while the staff's contributions are put in a trustee directed profit sharing account. The staff will never able to direct the profit sharing money so I see this as a huge no-no.

If we go ahead and prefund the staff into individual accounts, we remove that as an issue but what do we do about the participants who term prior to year end? Can we call their contributions an excess and remove it from the accounts prior to distribution?

Principals are pretty unbending when it comes to this prefunding issue so I'm trying to find a solution here.

[stephen]

I would not suggest funding a benefit before it has accrued. Perhaps the principals would allow you to amend the plan's allocation requirements so the money would not have to be called "excess" and removed. If the "excess" is mingled with vested or partially vested money it seems to me that it would be a pain to track, calculate, keep up with and explain to any affected participant. Maybe this is the cost of allowing the principals to direct their contributions...

[Mike Preston]

It is very difficult to write a response to the original post without hurling unkind adjectives at the clients who want to run a blatantly discriminatory plan. Either do as suggested and remove the accrual requirements or insist that the funding not take place early. Either run the plan as a non-discriminatory operation or remove yourself from its operation, as when it comes down, it will take you with it.

[Belgarath]

I have found that obstinate clients can usually be cured by saying something along the lines of, "What you propose to do is clearly violating the nondiscrimination requirements of IRC 401(a)(4). I suggest you contact an ERISA attorney to obtain confirmation of this if you are unwilling to take my word for it."

This usually shuts them up. Note that I said usually...