Have a profit sharing plan question

[Guest DonnaF]

I need some input. I have a profit sharing plan that funds their contributions monthly. However in order to receive you have to be there on the last day of the plan year. Therefore anyone who terminates mid year has to give back every contribution they received through the year (no earnings are considered), even if they are 100% vested. Basically the client is making the participants meet "eligibility" every year. So this would technically make the contribution an ineligible contribution. The contributions are not considered "forfeiture". They are reallocated among the remaining participants immediately. I have never come across this scenario in 10 years of recordkeeping and am not sure how to go forward.

And, the formula that they use is 10% of compensation up to 120,000. If the comp is over 120,000, it's 20% up to the max contribution limit of 49,000. Is there any guidance out there in regards to last day rules and funding contributions other than annually?

This is a group of doctors and support staff.

[Bird]

As you already know, depositing contributions early when there is a last day requirement is problematic. I agree that the contributions that are made that shouldn't be are not forfeitures - as long as they are allocated according to the terms of of the profit sharing formula; it isn't clear if that is being done or not.

[WDIK]

Is it a pooled investment account or does each participant have a separate investment account?

[Guest Pete Joachim]

I did run into this design way back when I worked in a insurance company (20 yrs ago) where matching contributions were made each payroll even though the plan had a last day of year rule. We called them "ineligible pre-paid premiums" or "IPPRs" for short. The bigger issue internally was the fact that as each matching contribution was removed from the participant's account - a corresponding broker commission would have be removed - obviously pissing off the broker -and this was WAY more important of an issue internally than the participant communication issues.

If I remember correctly, we treated the IPPRs as forfeitures and moved them to the forfeiture account and used them to reduce future company contributions (for the most part). Or they may have been transferred to an account held outside the Plan in the plan sponsor's name (return of mistaken contributions). Don't really recall but do remember it wasn't a real clear procedure and wasn't the same for each client - much confusion over this at the time.

After many meetings we got the document modified to clarify that participants are NOT eligible for, nor vested in, the match (even if deposited into your account and you directed the investment of these funds) until the last day of the plan year and after the ACP Test was performed (if applicable) or any other limit / test was performed.

This lead to many obvious participant communication issues - like why is money being removed from my account?

If its a pooled account, I guess some of these issues go away. But it is never a good idea to put $ in a participant's account, tell him about it (via a monthly, quarterly statement and now via the internet) then take it away from him.

[Kevin C]

Therefore anyone who terminates mid year has to give back every contribution they received through the year (no earnings are considered), even if they are 100% vested.

Can you elaborate on this? Are you saying that if $1,000 is allocated as profit sharing contributions and invested and the participant terminates, then $1,000 is removed from the account regardless of what the investment gains or losses have been on those contributions since the amounts were allocated?

[Guest DonnaF]

Therefore anyone who terminates mid year has to give back every contribution they received through the year (no earnings are considered), even if they are 100% vested.

Can you elaborate on this? Are you saying that if $1,000 is allocated as profit sharing contributions and invested and the participant terminates, then $1,000 is removed from the account regardless of what the investment gains or losses have been on those contributions since the amounts were allocated?

That's exactly what happens. Earnings are not considered at all. I don't believe it is a pooled account. There are 4 different brokers on the plan and the participants can invest with one of the 4 of their choosing. The brokers represent Wells Fargo, Charles Schwab, Vanguard and one other. It just seems to be fundamentally wrong in some way. I plan to try and have one of our consultants talk to them about going daily or to a platform like John Hancock.

Also, since the participants are split between 4 different brokers the prior administrator (no longer with the company) would take the "ineligible contribution" and redistribute it among the remaining participants in that particular brokers house. For example if the terminating participant had their money invested at Wells Fargo along with 10 other people in the plan, she would reallocate only among the Wells Fargo group. Even though there are a total of 190 participants spread out among the 4 different fund houses.

[Bill Presson]

It just seems to be fundamentally wrong in some way.

That's because it is. If the plan has a last day employment requirement, then you can't allocate (eg deposit) a profit sharing contribution until it's earned.

[Bird]

For example if the terminating participant had their money invested at Wells Fargo along with 10 other people in the plan, she would reallocate only among the Wells Fargo group.

Well of course, the "reallocate by broker" provisions of the plan apply.

Even though there are a total of 190 participants spread out among the 4 different fund houses.

And the auditor has been ok with this?

[ESOP Guy]

Most plans are run for the benefit of the participants. This one sounds like it is run for the benefit of the commission earners.

[Kevin C]

So, is any of this actually in the plan document?

[Tom Poje]

At the 2009 ASPPA Annual Conference, (question 33) was along somewhat similar lines -just substitute profit sharing for match:

(While its true such responses don't necessarily represent an official IRS position, it is food for thought)

A plan provides for a discretionary match which is computed on an

annual basis. All participants share in the match. To avoid a large

contribution at the end of the year, the employer contributes (for

example) a 100% match on deferrals not exceeding 4% of

compensation on a payroll basis throughout the year.

Under the final 401(m) regulations, you cannot prefund matches before they are

earned. Therefore, we will assume for purposes of this question that no requirements

apply in regard matching contributions. On that basis, we are concerned that the

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

I suppose, arguably, one could say you only find this in the 401m regs and not in the a(4) regs. of course, just as arguably one could say that the 401(m) regs were revised recently and the a(4) regs haven't been revised, at least in regards to this issue.

I have a real problem if gains aren't included in any adjustment. Any correction under EPCRS alsways includes an adjustment for gains. and if, say, the match depsoited was $1000 and the person terminated so the $1000 was removed. further assume the investment lost money that year. this means the person is penalized for receiving a match he wasn't even entitled to.