Prefunded Money Purchase Contribution

[Guest Grumpy456]

A plan uses a calendar year plan year. For simplicity, assume there is a single Plan participant and a single trustee. The plan is a money purchase pension plan that imposes a last day requirement. The employer anticipates in March 2008 that its single participant will be employed on 12/31/2008 and prefunded its anticipated contribution. The employer estimated that the single participant's contribution will be $10,000 so in March 2008 the employer contributed $10,000. The $10,000 contribution is not allocated to the participant's account, but is held in a trust subaccount and is invested in mutual funds. In late summer, the $10,000 contribution is worth $8,500. The trustee decides to do an interim valuation, permitted by the plan, and the single participant's account is adjusted to reflect the $1,500 loss. In October 2008, the $10,000 contribution is worth $5,500. The trustee again decides to do an interim valuation and the single participant's account is adjusted to reflect the additional $4,000 loss. No portion of the actual $10,000 contribution is allocated to the participant's account. On December 31, 2008, say the $10,000 contribution is worth $6,500. On the valuation performed as of 12/31/2008, the participant's account will reflect a contribution of $10,000 and an investment loss (everything else being equal) of $3,500--so their net 2008 MPPP contribution will not be $10,000, it will be $6,500.

Does anyone else see this as a problem? If so, why?

I tend to think it may be an impermissible cut back because the participant's 12/31/2008 allocation is less than the amount promised by the MPPP's formula (due solely to the investment losses the trustee is attempting to transfer to the participant).

What if, instead of the participant receiving $6,500, the participant receives $10,000, but the $3,500 loss is made up by reducing the participant's pre-allocation account balance by $3,500--you get to the same point.

Any thoughts? Thanks in advance for your comment.

[david rigby]

Not very wise, huh?

The contribution (and deduction) still look like $10K to me.

[WDIK]

The contribution (and deduction) still look like $10K to me.

I agree. The contribution amount is based on the deposit into the trust, not on the segregation to a single participant's "account".

[Bird]

I agree. $10,000 contribution to, and $3,500 loss in, a "pooled" account. $6,500 would be transferred to the participant's segregated account.

[Guest Sieve]

Not so fast--I think a little due dilignece is a good idea. Does the Plan (or Trust) document say anything about when the % of comp contribution/allocation is to be made? Most plans leave it to employer discretion (here's what Corbel says: "nless otherwise provided by contract or law, the Employer may make its contribution to the Plan for a particular Plan Year at such time as the Employer, in its sole discretion, determines"), so that an "early" contribution is acceptable, but other documents might provide otherwise. I also would carefully review the SPD to make certain that this is an acceptable approach and that it fits into a reasonable interpretation of the Plan document as communicated to employees/participants in the SPD--otherwuise, there'll be some 'splainin' to do.

[WDIK]

I am having a hard time visualizing how any timing issues would affect the analysis that investment losses do not reduce the amount of the contribution.

[Guest Sieve]

If the plan document required that the contribution be made, e.g., between the end of the plan year and the due date, as extended, then an "early" contribution which at all times between dates A & B was less than the required contribution amount would violate the terms of the plan (to make contribution $X between dates A & B). I msut admit that I've never seen those limitations on a contribution, but I would simply want to make sure there was no limiting language which might cause the contribution to be problematic.

By the way, on what basis can the investment loss to an unallocated trust subaccount reduce the asset value of a participant's account? If there were multiple participants and one of them terminated before year-end, would he/she still have to absorb a proportionate share of the loss suffered by the $10,000 early contribution's investment? If the contribution were too high due to a mistake in estimating compensation for the year, would the employer take back a dollar-for-dollar portion of the original contribution, and not suffer any of the loss?

[Guest Grumpy456]

Thanks for the comments.

Let me change the facts a little bit--I've just received more info.

Let's assume there were two participants in this plan (P1 and P2). The employer (trust settlor) deposits $15,000 in the trust in March 2008 as an advance deposit (prefunded contribution). For simplicity, let's assume the 2008 contribution would be exactly $15,000 based on pay through 12-31-2008. P1 terminates in October 2008 when the $15,000 contribution is worth $7,000 (i.e., an $8,000 loss). The trustee invested the $15,000 in investments with a long-term investment horizon instead of a short-term investment horizon. P1's pay from 1/1/2008 through his termination date was $50,000. P2's pay from 1/1/2008 through 12/31/2008 was $100,000. The plan's required contribution (remember it's a MPPP) is 10% of pay and the plan imposes a LDOPY requirement.

At the time P1 terminated, the trustee elected to perform an interim valuation so that P1 would share in some of the $8,000 loss. Assume earnings and losses are allocated pro rata based on account balances as of the last valuation date. Using that methodology, $5,000 of the loss is assigned to P1 (who takes a distribution of her account balance minus $5,000) and the remainder ($3,000) is assigned to P2. Since P1 was not employed on the last day of the plan year, P1 never shares in the actual allocation for 2008 even though a portion of the loss attributable to the advance contribution for 2008 was assigned to her.

Assume the other assets were investment neutral (no earnings/losses). Doesn't it seem impermissible (for pure legal reasons) to make P1 bear some of the loss attributable to an advance contribution she was never eligible to receive?

This is what happened in the case I've been asked to review.

[Guest Sieve]

That's precisely my point (made in the post prior to yours, probably while you were composing it). I would think that the pre-contribution would be its own subaccount, suffer its own losses, and be allocated to P2 based on P2's proportional share of what remains (with the employer taking a return, due to mistake of fact, of amounts not allocated due to P1's termination of employment before year-end).

[WDIK]

If the plan document required that the contribution be made, e.g., between the end of the plan year and the due date, as extended, then an "early" contribution which at all times between dates A & B was less than the required contribution amount would violate the terms of the plan (to make contribution $X between dates A & B). I msut admit that I've never seen those limitations on a contribution, but I would simply want to make sure there was no limiting language which might cause the contribution to be problematic.

In my opinion, it seems unnecessary to complicate the discussion with a scenario that you admit you've never seen. Even so, I'm sure that we agree the investment gains or losses do not change the amount of the plan contribution, which was the point of the first three responses.

By the way, on what basis can the investment loss to an unallocated trust subaccount reduce the asset value of a participant's account? If there were multiple participants and one of them terminated before year-end, would he/she still have to absorb a proportionate share of the loss suffered by the $10,000 early contribution's investment? If the contribution were too high due to a mistake in estimating compensation for the year, would the employer take back a dollar-for-dollar portion of the original contribution, and not suffer any of the loss?

Does it not seem much more likely that we are talking about a pooled investment account scenario based on the fact that the "trustee decides to do an interim valuation"? In that case, the issue of unallocated trust subaccount versus allocation participant account seems irrelevant.

[Bird]

Based on the change in facts, it appears that this is a pooled account; the original post led me to believe there were both segregated and pooled accounts. In this new scenario, once the contribution is made, it becomes part of the trust and there's no point in identifying that "the contribution" had a loss. It's totally irrelevant. The trust had a loss of $8,000 and it is appropriate to allocate it to all participants, if an interim val is done.

It also appears that there is an overcontribution of $5,000.

[Guest Grumpy456]

The consensus (and thanks for the input) is that an unallocated contribution may be made to the trust and, as in this case, given that there is only a pooled investment fund, any earnings/losses on that unallocated contribution should be spread among participants as of any regular or interim valuation date according to the plan's formula for spreading earnings/losses. The also seems to be a consensus that the investment experience allocation issue is separte from the required contribution allocation issue given that the required contribution cannot, by its terms, be known before year end.

Now, let's say the participant demographics turn out to require a year end contribution of $1,000,000 (i.e., the formula is 10% of pay and 10% of the pay of eligible participants is $1,000,000). Let's also assume that an advance contribution of $800,000 was made in March and on account of investment losses is worth only $600,000 on 12/31/2008. How much money, if any, does the plan sponsor have to contribute to the plan in order to satisfy its obligation under the money purchase pension plan formula which equals $1,000,000?

Options:

(1) $400,000 (the difference between $1,000,000 and $600,000);

(2) $200,000 (the difference between $1,000,000 and the advance contribution of $800,000)--this is the scenario in which the participants, prior to the allocation date, are assigned a portion of the loss attributable to the $800,000 deposit (given that two interim valuations were done, some of the loss was spread to participants who will not share in the year-end allocation); or

(3) some other amount.

[WDIK]

In my mind, it is clearly $200,000. No ifs, ands, or buts.

Earnings have nothing whatsoever to do with the appropriate contribution and its allocation, whether required or discretionary.

[Bird]

In my mind, it is clearly $200,000. No ifs, ands, or buts.

Earnings have nothing whatsoever to do with the appropriate contribution and its allocation, whether required or discretionary.

Agree. No doubt whatsoever.