allowing deferrals in 401(k) plan before document is actually executed

[Guest beth beaube]

I am being told by 401(k) prototype sponsor that it is appropriate to allow deferrals in a 401(k) plan prior to the date that the document is executed so long as: (1) the deferrals are placed in a trust within the 15-day period (which funds would be transferred to the trust subsequently established for the plan); (2) the effective date of the document is retroactive to the date the deferrals were first withheld; (3) the document reflects the appropriate deferral percentages (ie, the document reflects what the participants' election forms allowed them to defer). This is contrary to what I have always thought; that is, I have always thought that deferrals could not be allowed until there was an executed document in place. Further, even if deferrals could be allowed before a document is in place, I do not think it is appropriate to place the deferrals in another trust to later be transferred to the trust established for the plan. Any thoughts?

[Guest ESOPwizard]

See 1.401(k)-1(a)(3)(ii) and find a better advisor before you adopt the plan.

[LCARUSI]

Please post it.

[Guest beth beaube]

ESOPWizard - thanks for your response.

[LCARUSI]

Beth-

Giving your advisor the benefit of the doubt, are you sure you understood their suggestion?

It sounds truly bizarre to suggest that deferrals be "placed in a trust" and then transferred to the plan's trust after it is established. What is the nature of this temporary trust?

It would be interesting for your advisor to post a message/explanation in this thread.

[Guest beth beaube]

I am positive about their suggestion. Further, this is a very large prototype sponsor. I will not give the name as they would probably not appreciate my doing so. The sponsor has no legal basis at all for suggesting this. The sponsor is saying, "We do this all the time." Because this is a large sponsor that claims to be "doing this all the time," I thought maybe I was the crazy one. I have provided the sponsor with a citation to the 401(k) regulations and I am now waiting on a response from them. If you are interested in their response, I will be glad to post it.

[Guest Harry O]

Employees would be taxed on these purported deferrals. The "temporary" trust is not a qualified trust and it should be a trust not subject to the employer's creditors to avoid DOL problems with failure to deposit employer contributions and to avoid failure to fund problems under Title I. This combination means that employees would be taxed on these deferrals set aside from creditors in a non-exempt trust.

This type of advice from a national vendor is disgraceful . . .

[KJohnson]

However, check out July 13 edition of Employee Benefits Update in the "What's New" section on this web page. The IRS has apparently ruled that contributions to an existing non-qualified trust which are then transferred to an existing 401(k)Plan's trust are still excluded from employee's comp and treated as made in the calendar year which they would have otherwise been paid as wages. The facts are a little different from the ones you presented and I havent' read the full text yet, but it might be worth a look.

[Guest beth beaube]

kjohnson - thanks for your comment. I believe the distinction in our case from that presented in the recent ruling by the Service is that we do not have a plan document in place; in the ruling, they at least had an existing 401(k).

[Kirk Maldonado]

That PLR involved contributions by Top-Hat Employees to a nonqualified deferred compensation plan that were later transferred to the 401(k) plan. Very different facts.

[Guest JPCMPLS]

It is not clear from the initial inquiry whether the national prototype sponsor is actually recommending a non-qualified trust be established or not. However, my TPA clients are regularly asked to begin administering new plans prior to formal execution. Treas. Reg Section 1.401(k)-1(a)(3)(ii)says that a cash or deferred election is valid so long as the cash wages deferred are not available at any time prior to the later of the plan's formal adoption or effective date. For example, we believe that a plan effective 7/1/99 with the first July payroll date of 7/15 could be executed on July 10 and be in compliance with the regulations.

[Guest beth beaube]

JPCMPLS - thanks for your response. I agree with your example. However, in the situation I am confronted with, the deferrals would be occuring before the plan document had even been adopted. In your example, the actual deferrals occur after adoption of the plan.

FYI - the prototype sponsor is recommending that a non-qualified trust be established until there is a qualified trust in place.

I have already told the prototype sponsor that I strongly disagree with its recommendations for all of the reasons discussed in this thread. The sponsor has simply said "OK" and has not pushed or supported its recommendation with any legal precedent.

[LCARUSI]

IRS examination guidelines for 401k plans state, in part, that a participant's cash or deferred election "may not be made effective prior to the later of the date the cash or deferred arrangement and the plan are adopted or become effective."