Contributions and Allocations

[Guest Jim_Mauro9]

Here's my situation: An employer wants to pre-fund his PS plan early in the plan year, and then allocate the funds later for the same plan year.

Is there a code section which dictates the point at which a contribution needs to be allocated to a specific participant in a defined contribution plan?

I've been unable to find something that is more specific than "the end of the year", but it seems dodgy to deposit unallocated money. Does a "Last Day Rule" make a difference in the freedom to do this?

Thanks.

[Tom Poje]

someone asked a similar type question in regards to matching contributions computed on an annual basis, if they could

fund during the year to avoid a large contribution at the end of the year. one of the IRS comments is as follows:

Q and A #33

...On that basis, we are concerned that the

allocation violates the terms of the plan, which provides for an annual allocation.

this was in the context of allocating to individuals throughout the year, so the situation might not be the same. I certainly wouldn't want to allocate the amount to indiviudals, especially if there are hours requirement or last day rule.

[BG5150]

It sounds like the ER wants to put money into the plan over time and then allocate it to the participants. I've always advised against that, because, once in the trust, they money should stay in the trust. What if over the year business conditions turn unfavorable, and the ER no longer wants to make (or can afford to make) the PS contribution? Its hands are tied if the money is in the trust.

What I usually suggest is to take the money that would have gone into the plan and put it into a separate retail account (bank or brokerage). When it comes time to allocate the money, the ER has the opportunity to liquidate some or all of that account to fund it.

And as for pre-funding individual accounts if there is an hours or last day requirement, check the document. A volume submitter I have worked with in the past says that if there is an hours/employment stipulation, then all the money needs to be deposited after the end of the plan year. If even a dime goes in before the end of the year, then the allocation conditions are waived, and everyone gets a piece, regardless of service or employment status at the end of the year.

[Mike Preston]

I'm not sure I'm understanding. If the plan provides for pooled accounts the contribution can be made at any time. If the plan provides for individually allocated accounts, no contribution can be made unless it is directly into an individual account. Maybe this has already been said in the above messages. If so, ignore.

[Guest Jim_Mauro9]

I'm not sure I'm understanding. If the plan provides for pooled accounts the contribution can be made at any time. If the plan provides for individually allocated accounts, no contribution can be made unless it is directly into an individual account. Maybe this has already been said in the above messages. If so, ignore.

Mike: You've got it right. We always operated under the premise that if it's in the plan, it must be allocated. What I really need is the specific code section which says you can't put it in the plan with putting it in the individual accounts... Thanks. Jim

[Mike Preston]

Since it is specifically allowable to do what you want to prohibit, I don't think you'll find a citation that supports your position. I think you need to look to the plan itself. Does it provide solely for individual accounts? If so, isn't that your cite?