PS allocation before year end

[Santo Gold]

Any help clarifying the following would be appreciated.

A PS plan has an "employed on the last day of the year" allocation requirement. The company also likes to deposit PS money into the participant's individual accounts throughout the year. The employer deposits an equal percentage of pay for everyone, or at least a makes a reasonable estimate to keep things equal. Not the cleanest way to do things, but valid nonetheless. If a participant leaves before year end, then the PS money for that participant is moved eventually to all of the eligible participant accounts, based on the final contribution allocation calculated after year end.

Question 1: This is valid, is it not?

Question 2: The participant can direct this current year PS money, just like the rest of the account balance, correct?

Question 3: By depositing PS money during the year, the employer is "committed" to at least this PS amount, right? That is, the employer cannot make $50,000 in PS deposits during the year, and then at year end decide that the company only wants to make a $20,000 contribution?

I have an accountant argueing that because of the employment on the last day requirement, that no allocation is valid and that no PS money should be going into anyones accounts during the year, let alone having the participant's self-direct this money that is not really their's yet. I see his point and I agree that making deposits in mid year is not a great idea.....but I still don't think that any of this is necessarily wrong.

Any thoughts, comments or cites that can make the case one way or the other?

Thanks

[BG5150]

I am not a big fan of this arrangement. I read somewhere that the DoL is not a big fan of putting money in people's accounts and then taking it away from them either.

If the employer wants to have its PS contribution amortized over 26 payments, I'd suggest they take the amount they were going to deposit in participants' accounts and put in it a separate bank account, then allocate it after plan-year end.

What happens if Janey Mulroney has $3,000 put in her account during the year, but it's only worth $2,500 at year-end when it gets shared among the eligible participants? Does the Employer want to take the full deduction, even though only $2,500 of it really got allocated to participants' accounts? And how do you figure out the gain or loss in the account if prior years' PS money is in there? Are you time-weighting the returns?

[PLAN MAN]

I agree with the accountant. If the plan has an allocation requirement that the participant must be employed on the last day of the plan year to receive the employer contribution, then they have not "earned" that money until the end of the plan year. I don't believe the plan document supports the employer's actions. I vote not valid. The employer cannot have it both ways - put money in during the year and restrict who receives it with the last day rule.

I also agree with the suggestion to deposit the funds in a separate bank account outside the plan, then the employer has all the flexibility they want in determining the contribution amount each year.

This can get ugly not only when there is a loss in the participant's account from which fund are being removed, but also, if the participant takes a distribution of these funds and then it turns out they are not eligible to receive them. How would you handle that situation?

Tell the employer to remove the last day requirement if they insist on depositing contributions during the year.

[BG5150]

I worked with a plan document one time that said, at least for match, that if there was a last day rule (or hours rule), and even a dollar went into anyone's account before year-end, then the last day rule was waived. I don't remember if it was the same for the PS.

So check the plan document to see if it address the timing issue.

[Bird]

I vote for "poor operation with lots of pitfalls - but valid."

[Tom Poje]

in addition, if you (or the investment house) were providing quarterly statements, was there a note indicating that current year's contribution (plus associated earnings) was subject to last day provison? and who calculates that amount of earnings?

I can think of one situation where such a method might not be deemed valid.

lets say the boss makes 100,000/month and the contribution is 6%.

now after 8 months he is maxed out at (or close enough) at $48,000. he longer receives any more because he bumps into the 415 limit, yet he has his full amount invested for another 4 months, unlike any NHCE. arguably a failure of BRF - no one else has that advantage.