employer changed mind about profit sharing contribution

[K2retire]

Employer with a daily valued plan persuaded the recordkeeper to set up an account for unallocated funds to which they made deposits in anticipation of making a profit sharing contribution. The employer has now encountered some cash flow difficulties and wants to take the money back out of the plan and not allocate a profit sharing contribution. I know that, absent a mistake of fact, they can't do that, but the recordkeeper has told them they can. I need a succint resource to show the client explaining why they cannot simply withdraw the funds.

To further complicate matters, it is invested in mutual funds that have lost money.

[david rigby]

...an account for unallocated funds ...

Having the recordkeeper establish an account is irrelevant unless there is actual cash moving around.

Where is the account? part of the trust? an investment account owned by the ER?

[K2retire]

It's an account within the plan.

[QDROphile]

Because of the exclusive benefit rules of section 401(a) of the tax code and of section 404(a)(1)(A) of ERISA, the plan terms should not have any provision that allows plan assets to be returned to the employer, except in limited specified circumstances, and the plan terms may have stronger prohibition language. If funds have been delivered to the trust, it is not a matter of finding authority that forbids plan assets from reverting to the employer, it is a matter of finding authority that allows assets to be delivered to the employer. The employer made a contribution. A defined contributin plan will have terms to determine how contributins are allocated. That will dispose of the amounts contributed unless the plan has other terms to cover some other disposition of the funds.

[Effen]

I agree with QDRO, but it also seems to me that setting up the unallocated funds account was probably also improper. Once the money hits the trust, it needs to be allocated. Generally, you just can't let it sit in an unallocated account. Seems to me the recordkeeper is a bit exposed in this as well.

If they wanted to pre-fund without any commitment, they should have set up an account outside the trust.

[ESOP Guy]

I am not sure that a profit sharing contribution can’t be put into the plan before it is allocated. I handle more balance forward PSP than daily. But you see a pre-paid PS cont on a regular basis. They can’t take it out of the plan once put in. I don’t understand in a daily environment putting it in a fund that can lose money either. I am not aware of a rule that stops a PS cont from being put into the plan throughout the year.

In ESOPs this happens all the time. The ESOP loan is paid monthly for example, but the allocation of the contribution to fund the loan payment is made as of the last day of the plan year. I am not aware of a special rule that makes ESOPs different than any other DC plan’s ER contribution.

As an alternative idea for the client that no longer wants to fund a contribution. Does the document allow for the plan to pay expenses? Does the employer normally pay the expenses not the plan?

If “yes” to both of those questions you could allocate the contribution and allocate the expenses to the people. The two won’t match up perfectly as the allocation methods are most likely different for the two types of allocations. But it would allow the client to reduce their future out going cash flow for the plan and be within the law. Not a perfect solution but an idea.

[masteff]

Discussion on suspense accounts tends to focus on forfeitures rather than PS prefunding, but along w/ QDRO's post, you might try to find Revenue Ruling 80-155 mentioned in the 2nd paragraph here: http://www.irs.gov/retirement/article/0,,id=223590,00.html

[Bird]

I am not sure that a profit sharing contribution can’t be put into the plan before it is allocated.

I agree.

I don’t understand in a daily environment putting it in a fund that can lose money either.

Right; that's just stupid, bordering on moronic.