question on prefunding 401(k)

[AKconsult]

My brain is not functioning today. What is the terminology for the fact that you can't fund a 401(k) contribution on money that hasn't been earned yet? I am trying to give info to a client but cannot remember the terminology for this in order to be able to research it.

Thanks!

[GMK]

Basically it's to prevent accelerated deductions, with specific limited exceptions.

For reference:

http://www.watsonwyatt.com/us/pubs/insider...ArticleID=14326

[Kevin C]

I tell clients the IRS regulations say you can't prefund deferrals or match.

1.401(k)-1(a)(3)(iii)Rules related to timing

(A)Requirement that amounts not be currently available.—

A cash or deferred election can only be made with respect to an amount that is not currently available to the employee on the date of the election. Further, a cash or deferred election can only be made with respect to amounts that would (but for the cash or deferred election) become currently available after the later of the date on which the employer adopts the cash or deferred arrangement or the date on which the arrangement first becomes effective.

(B)Contribution may not precede election.—

A contribution is made pursuant to a cash or deferred election only if the contribution is made after the election is made.

©Contribution may not precede services

(1)General rule.—

Contributions are made pursuant to a cash or deferred election only if the contributions are made after the employee's performance of service with respect to which the contributions are made (or when the cash or other taxable benefit would be currently available, if earlier).

(2)Exception for bona fide administrative considerations.—

The timing of contributions will not be treated as failing to satisfy the requirements of this paragraph (a)(3)(iii)© merely because contributions for a pay period are occasionally made before the services with respect to that pay period are performed, provided the contributions are made early in order to accommodate bona fide administrative considerations (for example, the temporary absence of the bookkeeper with responsibility to transmit contributions to the plan) and are not paid early with a principal purpose of accelerating deductions.

(iv)Current availability defined.—

Cash or another taxable benefit is currently available to the employee if it has been paid to the employee or if the employee is able currently to receive the cash or other taxable benefit at the employee's discretion. An amount is not currently available to an employee if there is a significant limitation or restriction on the employee's right to receive the amount currently. Similarly, an amount is not currently available as of a date if the employee may under no circumstances receive the amount before a particular time in the future. The determination of whether an amount is currently available to an employee does not depend on whether it has been constructively received by the employee for purposes of section 451.

The match prefunding rule is in 1.401(m)-1(a)(2)(iii).

[K2retire]

If you deposit money to a plan before it is withheld from an employee's pay, it is an employer contribution and must be allocated according to the document terms for employer contributions. Since that is highly unlikely to be allocated only to the one participant who thought they were prefunding their own deferrals, that usually is sufficient explanation.