last day rule for match

[k man]

Is it permissable for the employer to require that the employee be employed on the last day of the plan year if the employer makes the matching contributions over the course of the plan year instead of making the match at the end of the plan year?

[Fredman]

Its permissible, but not practical. If the plan is not daily, valued only once per year and only allows distributions once per year, it'll work ok.

I've seen plenty other plans do it this way, but its messy.

[Guest]

I agree its a pain to run.

unfortunately, your boss (the client) will insist.

not only do you have to 'forfeit' the match if you quit, but the gains associated with it. thats the real pain to calculate.

and make sure your statements carry a message that current year match subject to last day provision.

its ugly.

[k man]

i was aware of the difficulty of administration but I wanted to confirm that the forfeiture of the match did not violate any rule that i was not aware of. thank you.

[Guest]

I believe you do have a problem here if the employer has given the money to the participant throughout the year and then "takes it back" because they are not employed on the last day of the year. The DOL typically frowns upon having money allocated to a participant's account and then taking it out of the account. If they want to contribute money to the plan to be allocated at the end of the year, that's fine...just put it in an unallocated account.

I'm looking for the specific cite but have not found it yet. Anyone else have an opinion on this?

[MWeddell]

Carol,

I can't give any cites either because they just aren't there outside of the plan merger situation covered in the 414(l) regulations.

My understanding is that the IRS allows prefunding of employer contributions within the same plan year. If the document is drafted carefully and the text on the statements is clear that it is showing a conditional match, I don't think there's a legal problem.

[Guest]

I don't have a problem with employer pre-funding the contribution and then allocating it at the end of the year. Where I think the DOL has an issue is if the the pre-funded contribution is allocated directly to the participants' accounts, but there is a "last day" rule in the plan that says the participant must be employed to receive the contribution.

If the contribution has been allocated and the participant leaves prior to year end, then they are not entitled to the contribution because they are not employed on the last day of the year (of course, they could always come back, which just complicates things even more!). So, now you have to take that money back from the participant. That's where I believe the problem comes in.

It is definitely permissible for the employer to require the employee to be employed on the last day of the year, even if the employer makes the matching contribution throughout the year. The contribution, however, should not be allocated to the participants until the end of the year because of the last day rule. So, as long as the money is kept in a separate account and then allocated at the end of the year, there should be no problems.

[Guest JWBrown]

There are many providers, especially insurers, who do allocate periodic contributions (not just match) to participant accounts during the year, even when a plan has a work last day requirement.

Insurers are often driven to do this because the commission structure of their agents requires that money be in a participant's account in order to generate a commission payment. (Backwards, huh??) Also, some companies do their contributions on a payroll basis and want it to show up in employees' accounts so that employees make earnings on the amounts and maintain a greater appreciation of the company benefits on a regular basis.

The providers I've seen do this always have caveats on statements indicating that the participant is only entitled to the current year contribution and earnings on that contribution if the participant is employed on the last day of the year.