Prefunding Contributions

[Safeharbor29]

I need explanation on the following;

If the calculation period is changed to plan year then you could prefund those contributions. If they did this then they would have to make sure those prefunded contributions matched up with that plan year match, essentially a true up match.

[Bill Presson]

I have an idea what you're talking about, but I'm not gonna guess. You'll need to provide more details. Please be specific and describe the entire situation.

[Kevin C]

The prefunding prohibition for the match is in

1.401(m)-1(a)(2)(iii)Employer contributions not on account of an employee contribution or elective deferral

(A) General rule.—Employer contributions are not matching contributions made on account of elective deferrals if they are contributed before the cash or deferred election is made or before the employees' performance of services with respect to which the elective deferrals are made (or when the cash that is subject to the cash or deferred elections would be currently available, if earlier). In addition, an employer contribution is not a matching contribution made on account of an employee contribution if it is contributed before the employee contribution.

(B) Exceptions for forfeitures and released ESOP shares.—The rule of paragraph (a)(3)(iii)(A) of this section does not apply to a forfeiture that is allocated as a matching contribution. In addition, an allocation of shares from an ESOP loan suspense account described in §54.4975-11© and (d) of this chapter will not fail to be treated as a matching contribution solely because the employer contribution that resulted in the release and allocation of those shares from the suspense account is made before the employees' performance of services with respect to which the elective deferrals are made (or when the cash that is subject to the cash or deferred elections would be currently available, if earlier) provided that—

(1) The contribution is for a required payment that is due under the loan terms; and

(2) The contribution is not made early with a principal purpose of accelerating deductions.

© 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 are occasionally made before the employees' performance of services with respect to which the elective deferrals are made (or when the cash that is subject to the cash or deferred elections would be currently available, if earlier) in order to accommodate bona fide administrative considerations and are not paid early with a principal purpose of accelerating deductions.

I've highlighted the part that describes what a prefunded match is. There is no problem with depositing the match during the year as long as you comply with this reg section. With the match allocated at year end, it could be interesting to show that you don't violate this rule.

If the plan in question provides the match to all participants who defer (no hours or last day requirement), you should be fine calculating and depositing the match periodically throughout the year. But, if the plan has an hours or last day requirement to receive the match, estimating and depositing the match throughout the year is almost guaranteed to result in part of the amount deposited being prefunded and considered as not being match. I say that because you would be estimating a match amount early in the year for someone who ends up not being eligible for the match. When you try to use that amount for someone else later in the year, you end up with a prefunded amount.