Suspensing Money

[Guest andmik]

Hello,

Client wants to place employer contribution in participant accounts on a mothly basis. The employer contribution is subject to a 6 year graded vesting schedule within the plan.

Client wants to impose an annual 1000 hour requirement. If the participant at year end does not meet the accrual requirement, client wants to remove the money from the participant's account.

This seems counter-intuitive since it always seems that the vesting schedule is the only thing that governs the removal of money (other than operational errors and such).

So the client will have someone who is already 100% vested for example, when they look at their account balance while employed, will see that they are 100% vested but when they take a distribution, they will "forfeit" money that was placed in their account that year, due to them not working 1000 hours.

I cannot find anything specific that prohibits this, but wondered if other run into this situation and how they may address this.

Thank you.

[Guest Quicksilver]

For our clients that want to do this we deposit all contribution to a seperate account, and then after year end allocate that account including earnings/loss to only those who qualify for a contribution. Be sure not to overfund in actua plan year.

[Guest andmik]

Thank you.

One point of clarification - When you indicate that you invest the money in a separate account, you mean not the participants' accounts correct.

Basically you place the whole funding in a "holding account" within the plan and then allocate it out, correct?

Thank you,

Andmik

[Guest Quicksilver]

correct

[maverick]

If the employer insists on posting the pre-funding into participant accounts, here's another idea: Set up an additional profit sharing source (current year contributions) with 0% vesting. For all those who meet the hours requirement, transfer the pre-funding and earnings into their "regular" profit sharing account. The pre-funding account is forfeited for anyone who does not work 1,000 hours. I'm sure someone will say that this is a bad idea (can't remove money from a person's account once it goes in), but it's a way to do what the ER wants.

I won't even comment on how it's poor plan design to pre-fund and impose a 1,000 hour rule (and/or last day requirement) for employer match or profit sharing contributions, because it's already been said many times.

Maverick

[Bird]

Maverick, that's not a bad idea as a work-around for something that shouldn't be done anyway (as you note). I would use caution though, in using the word "forfeit." It's not a forfeiture in the plan sense of the word; it's just money that should never have been allocated in the first place. FWIW.

[BG5150]

That's the way we do it. We create a source called "Current year PS" (or something like that). That source is 0% vested. If and when a participant terminates, that money gets put in the forfeiture account.

But the plans we do this for have a last day rule. So early in the next plan year, we transfer all the money from the "current year PS" to the regular PS source that is on the proper vesting schedule.

[Guest andmik]

Thank you for your responses. I agree it is not a good a good design and certainly we are trying to outline the pitfalls but that does not seem to matter to some.

Andmik