Non-traditional source for contributions

[TPApril]

Small business, husband and wife (as support staff), with 3 full time additional staff and new comparability plan design. Income for business is generated through monthly payments by contracts. Can they set up an arrangement so that a specific portion of a monthly payment is paid directly from payor into their retirement plan trust, which would then be treated as Employer contributions for the Plan Year? For instance 51,000 - 17,500 = 33,500 / 12 = 2,791.66. Contract generally pays up to $5,000 per month though changes every month. So, for example first $2,791.66 of one particular contract would be set up to go right into the trust for the husband.

If such an arrangement is possible, would it be discriminatory in not putting in moneys on an ongoing basis to the 3 additional staff, since it would then be getting difficult to add in payroll elements to a contract payment?

[ESOP Guy]

I am not 100% sure I understand the question so I am going to answer with a question.

Is the plan an indvidually directed daily valued plan or are the assets being held in common on a balance forward basis?

[four01kman]

My immediate reaction is if the contribution is not made by the employer, it is not a contribution.

[jpod]

please explain why they think this is a good idea; i'm dying to know

[QDROphile]

Cutting through the considerable amount of strange and probably inadvisable stuff, they cannot provide for allocations to the accounts of owners earlier than corresponding allocations to accounts of the the other participants. ESOP Guy's questions are getting to the same point.

[TPApril]

Plan is indvidually directed daily valued plan. Why do they want to do this? They think it would be easier for them.

Let's change the scenario slightly - since the 3 staff are on payroll, say that 5% of pay was set up as an ongoing ER contribution from the Employer. Hopefully this would this take away the issue of discrimination of contributions, and then lets focus on this odd contribution source arrangement. To four01kman's question and my stated topic - could such a source for contributions be allowable?

[PensionPro]

How is the vendor going to report these payments to the IRS? Is it too much trouble for the employer to make deposits to the trust from their own account?

[BG5150]

Say this was allowable. Vendor pays investment house send $2,500 c/o the Plan. How does the asset provider know how to break down that $2,500? I would think they need specific instructions from the Employer.

Most daily shops can handle doing ACH debits. So when the ER gives them the breakdown, the provider can just debit the ER's account.

I don't see how it could get any easier than that?

Plus, it would be much easier to verify a payment to the Trust if it came from the ER account. How do you know Vendor send their portion of the "contribution" this month.

[david rigby]

Call me skeptical, but I believe there is hidden other motivation for this idea, and it's likely an attempt to minimize taxes.

[jpod]

David Rigby: I don't think you're such a skeptic; I think their motivation here is obvious. For some reason, which could be tax but it could be something else, they don't wish to have that money land in their business account.

[TPApril]

The tax argument is an excellent one, hadn't thought of that but it certainly brings up even more complexities to make this, simply put, not a workable arrangement from many perspectives.

[ESOP Guy]

From a tax perspective even if it did get deposited directly into the plan they would have to show the money as a gross receipt to them and then take the deduction. To show it any other way would make it a contribution from some place other then the plan sponsor which can't happen.

I can think of other cynical reasons to do this but I would obviusly just be speculating.