Match As-You-Go w/ Allocation Conditions

[LANDO]

I am sick of sponsors that insist on allocating matching contributions to participant's accounts over the course of the year AND insisting on having allocation conditions (last day, 1000 hours, or both)! I am looking for support for the propostion that allocating a match to participant's accounts before the allocation conditions have been met is a Code, Reg, or IRS or DOL Guidance violation.

Any thoughts?

[Belgarath]

Well, you could start with 1.401-1(a)(2), which requires a plan to be a definite written program. Beyond that, I'm not certain that the Code or Regs say, in precise wording, that the plan must be operated according to its terms. (They might, and I'm just not aware of the specific reference)

However, it is SO well established that a plan must be operated according to its terms, and to not do so is a disqualifying event, that it would be absurd to argue otherwise. You could refer your client to, among other things, Revenue Procedure 2013-12, which defines operational errors as disqualifying events.

Although you can correct operational errors under 2013-12, one of the requirements for self-correction, which IRS auditors look for, is some documentation of how such errors will be prevented in the future. So it isn't a never-ending pass to ignore the rules.

I think most TPA's struggle with similar clients. I'm continually astonished at how many clients hire us to do plan administration, then ignore what we tell them to do.

[LANDO]

Thank you for your reply Belgrath, and the operational defect of failing to follow the terms of the plan document is the position that I've taken on the issue. I hadn't thought of the angle that continually correcting using SCP is not available as procedures must be established to make sure the same error doesn't happen in the future. That is a wrinkle that I will add to my arsenal.

[BG5150]

I used to work with a plan document that said if you had a last day rule and if any contributions came in during the year, it was deemed the last day rule was waived for the year.

[LANDO]

That would be sweet. I would certainly be good with that, but ours has no such language. Sponsors want to have their cake and eat it too, i.e. the benefit of showing the match going into the account over the course of the year, AND not having to make match for terms.

Any thoughts about funding the match into a non-allocated account in the trust? I don't know that this would be a pre-funding match issue, as the deferrals to which the match relates is already in the plan.