New Comp contribution deposited on a per payroll basis

[Guest TomB432]

Is there any prohibition against depositing employer contributions on a payroll by payroll basis that will be tested on a cross tested basis assuming there is nothing in the plan document specifically preventing it?

For example one group of employees will receive 10% of their pay for the payroll period and another group will receive 5%. At the end of the year the contributions will be tested on a cross tested basis. If it does not pass the company can make additional contributions for the lower group. Would it also be allowable to forfeit contributions for the higher group in order to pass nondiscrimination?

[rcline46]

Does the plan have any requirements for receiving the contribution such as a 1,000 hour requirement, or an end of year requirement?

Once the money is in the participant's account, you cannot then forfeit it to pass testing, the only 'correction' would be to add contributions to other accounts.

What does your document say about people who may change groups during the year?

Details are needed to receive an answer that you can use.

[Guest TomB432]

Does the plan have any requirements for receiving the contribution such as a 1,000 hour requirement, or an end of year requirement?

Once the money is in the participant's account, you cannot then forfeit it to pass testing, the only 'correction' would be to add contributions to other accounts.

What does your document say about people who may change groups during the year?

Details are needed to receive an answer that you can use.

My question is more of a general one. If you can do it at all and if so are there any restrictions such as not having an end of year requirement. Is that an issue? I know plans that deposit matching contributions during the year but have an end of year requirement. If someone terminates the match for that year is removed. Would it be the same for a New Comp profit sharing allocation?

[BG5150]

Check the plan document. I used to work with one that had a provision that if there was an hours or last day rule for an allocation and even a dollar was contributed before year-end, then the hours or last day rule was considered waived for that year.

[Bird]

Generally speaking, I think you may fund such contributions on a payroll basis, or otherwise throughout the year. But I think it's a bad practice, terribly actually, for at least a couple of reasons...

as noted, if you have an hours or last day requirement, you might be funding contributions that shouldn't be.

or if you didn't really want to put that much in for a person, group, you might be funding contributions that shouldn't be.

Now when you have those contributions that shouldn't be there, you have problems. You can't "forfeit" them because it has nothing to do with a forfeiture. You can, in theory, move them to another participant(s) in the plan to satisfy your actual desired allocation, but then, how do you handle the gains or losses that might have accrued on those contributions? That gets ugly very quickly. You could "just" add money for other participants, but that might not be desired, and doesn't solve the problem if someone shouldn't have anything at all.

Also, if you are pre-funding HCEs at a higher rate than NHCEs, it could be discriminatory in practice.

[Tom Poje]

someone asked a similar question in regards to matching contributions at the ASPPA Conference 2009 Q and A#33

(And a reminder that such comments are opinions only, but they at least provide some guidelines)

Q

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. Is there a

violation of the timing of contribution regulations if the employer

computes and funds the match this way, and then deposits any

possible match true-up at plan year-end?

A

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.

......................

if they view the nonelectives in a similar vein, then you certainly have problems if there are alloaction conditions.

and as they indicated, you really have to be careful with how the document is worded if that is the intent.