Matching Contribution Allocation Rules

[Guest jvanheyde]

We have a client whose 401(k) Plan document provides for a discretionary match, and requires employment on 12/31 and 1000 hours of serve in order to be allocated the match.

The problem is that the corporation actually makes the match each payroll period and credits the participants' accounts. They can see the money on the website of the financial vendor. Nonetheless, if a participant leaves before 12/31 or does not have 1000 hours, they take the contribution (and income) back out.

Is there an argument that when the match is first credited to the participants' accounts (i.e., after each payroll) that this is the allocation, and it is not permissible to take the money back out at 12/31? If it is, any suggestions on how to continue to do a per payroll payment, but still require the 12/31 and 1000 hour employment criteria?

[QDROphile]

Whether or not you can make the arrangements work legally, it is stupid, so just stop.

[jpod]

Surely you don't mean they actually take the money back FROM the plan. If that's what they do, it is a per se violation of the exclusive benefit rule (i.e., no mistake of fact).

[Guest jvanheyde]

Surely you don't mean they actually take the money back FROM the plan. If that's what they do, it is a per se violation of the exclusive benefit rule (i.e., no mistake of fact).

No, they do keep the money in the plan, but use it to offset the next matching dollar required.

[Tom Poje]

I would recomend putting match made during the year into a holding account and then actually allocating it after the end of the year.

you have a real mess figuring out what gains to attribute to such match.

you also have a problem with showing $ in someones account that they might not even be entitled to.

[katieinny]

We had the very same issue with a client. After this went on for a couple of years, we insisted that they either amend the plan to remove the 1000 hours/last day requirement or stop making matching contributions each pay period. They finally saw it our way and amended the plan.

[BG5150]

Our Adoption Agreement explicitly does not allow for recurring (ie during the plan year) matching contributions if there is a service requirement imposed to get said match. If there is a service requirement, then the match has to be made after the plan year ends. If there are recurring match contributions, everyone gets it, regardless of hours or employement status at the end of the year.

[PLAN MAN]

So many reasons not to do this. You mentioned they take the contribution and income out of the participants' account and use the money to offset the next matching dollar required. Does this offset include the income or just the original contribution? I don't think the employer can use income earned in the plan to offset their contribution. The earnings should be allocated to eligible participants based on a nondiscriminatory formula. What if there is a loss on the match dollars in the account?

I agree, showing particpants the match in their account when they have not yet accrued it - looks like a problem. If a participant terminates and takes a distribution during the year, is the plan sure they are taking back the match for that year before the distribution is paid? It would be easy to pay the participant the full amount in their account. How does the plan calculate amounts available for loans, hardships, or other in-service withdrawals with the match in the account?

This method should not be allowed to continue.

[Mike Preston]

Everybody in the business knows that this arrangement is stupid. Yet, it pops up all the time. Amazing.