Allocation Conditions

[MarZDoates]

Participant must be employed on last day of plan year, or work 500 hours in year of termination to receive a match.

In 2017, one participant received a match, but term'd with 300 hours.

Is a retroactive corrective amendment to eliminate the allocation conditions for 2017 an appropriate correction?

The match is calculated and deposited each pay period, I'm thinking we should eliminate the allocation conditions altogether.

Plan has no HCEs.

Comments please?  Thank you!!

[Bird]

If you're going to calc and deposit each pay period then most likely you should have that in the plan, or at the very least not have any allocation conditions. 

To be clear, if you say the match is determined each pay period as per the plan document, then that is it - i.e. there should be no final/annual calc with potential true-up.  But if the match is determined on annual pay, then those deposits can still be made each pay period but I would consider them estimates, subject to review after the final annual calc, and subject to potential true-ups.

[JamesK]

I agree with Bird but would simply add a final step which is to treat the amounts conditionally allocated to the terminated participant as either reallocations or forfeitures. 

The contribution of amounts to participants who have not yet satisfied the conditions for allocation should probably be revisited to see if there is a better way of handling matching contributions. 

[Luke Bailey]

I don't think you can amend in 2018 for 2017 outside of VCP. I suggest you amend for 2018 and forward (or, alternatively, don't amend and wait to contribute matching until after the end of the year), and for 2017 use self-correction under EPCRS and tell the individual in question that he/she got an excess distribution that (a) is not eligible for rollover, and (b) should be returned. But say it in a nice way. It should be OK if he/she doesn't actually return the money, because IRS would likely accept the argument that it was not worth tracking down and threatening to sue the person to get it back.

[card]

"The match is calculated and deposited each pay period, I'm thinking we should eliminate the allocation conditions altogether."

Deposited where? What does the plan doc say? Is the contribution allocated to each participant's account each pay period (ie, reflected in their current balance, subject to forfeiture if they don't meet the allocation conditions)? If so, I agree with JamesK that this "should probably be revisited to see if there is a better way of handling matching contributions."

In my opinion it's extremely questionable whether a plan can "forfeit" these "conditional allocations" once they're in an employee's account if the participant is otherwise fully vested. I think such an employee could have a very good argument that he/she owns the contribution once it's deposited in their account.

[Bird]

On 4/22/2018 at 5:54 AM, card said:

In my opinion it's extremely questionable whether a plan can "forfeit" these "conditional allocations" once they're in an employee's account if the participant is otherwise fully vested. I think such an employee could have a very good argument that he/she owns the contribution once it's deposited in their account.

Reality:  If money is incorrectly deposited it is definitely ok to "take" it out of an account.  It is not a forfeiture although casual usage and in fact instructions to the investment provider might use the term "forfeit."  The fact that it is done through careful and accurate mathematical calculation, but nevertheless done incorrectly because it did not comply with plan terms, isn't much different from accidentally moving a decimal point, or simply calculating incorrectly, or whatever other mistake you can think of.

Perception is a different matter and having said all of that, I'd be inclined to leave it in the account.  Of course as suggested, either the plan provisions or the procedures should be changed to align with one another.

[BG5150]

Just because it's calculated on a payroll basis, doesn't mean it has to be deposited on a payroll basis.

Unless it is a Safe Harbor Match calc'd on a payroll basis.  Then it has to be deposited by the end of the following quarter.

[RatherBeGolfing]

If the plan has 500 hours / last day as allocation conditions, does it really matter that you calculate and deposit it on a payroll basis?  If they fail to meet the conditions, they are not entitled to the match, and it is never allocated to the participant.  In my opinion, it is no different than depositing $1,000 for a $700 allocation, you move the excess to an unallocated account and use that those funds for your next deposit.

 

[Kevin C]

12 minutes ago, RatherBeGolfing said:

If the plan has 500 hours / last day as allocation conditions, does it really matter that you calculate and deposit it on a payroll basis? 

 

I think it matters.  From Rev. Proc. 2016-51: "To be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements."  I don't see how a procedure that ignores plan provisions during the year and then tries to "fix" it at or after the end of the year satisfies this requirement.  Plus, part of the SCP correction is to revise your procedures to try to prevent the operational failure from happening again.  So, it should not be an on-going issue. 

[card]

"If money is incorrectly deposited it is definitely ok to "take" it out of an account."

The money was not incorrectly deposited if the plan says that the contribution is made and allocated each payroll period. That is a plan design choice. And if a plan makes that plan design choice, they have to understand that it is inconsistent with the concept of full vesting. That's why I asked the OP what the plan document says.

To make it simpler, I have seen plans that have a last day requirement, but the match is contributed and allocated to employee accounts each payroll period (they accrue investment gains and losses, are reflected in account statements, etc). Then, if the employee terminates before the end of the year, this "conditional match" is removed from the employee's account.

Under the Section 411 regs a contribution that is conditioned on performing future services is a forfeitable contribution. An employee who is 100% vested has a right to 100% of his/her entire accrued benefit. The accrued benefit of an employee in a DC plan is the account balance at any point in time. You can't make a forfeitable contribution to the account of a fully vested participant. You can have a last day requirement, and in some cases you may be able to remove the funds if the employee terminated before the end of the year, but not if the employee is fully vested.

1.411: For purposes of section 411 and the regulations thereunder, a right to an accrued benefit is considered to be nonforfeitable at a particular time if, at that time and thereafter, it is an unconditional right. Except as provided by paragraph (b) of this section, a right which, at a particular time, is conditioned under the plan upon a subsequent event, subsequent performance, or subsequent forbearance which will cause the loss of such right is a forfeitable right at that time.

This is a tax and ERISA issue.

[BG5150]

Be sure to read the plan doc carefully, especially the Basic Plan Document if there is one.

I dealt with one plan that said if there are allocation conditions for match such as hours or a last day rule, AND if the are any deposits to a participant's account before the end of the year, then the allocation conditions are considered waived for that year.  (And then everyone would get a full-year match with true-up.)

[Tom Poje]

other issue with a design like this

 

if you give out quarterly statements, do the statements indicate 'oh, by the way, you might not receive , current year allocation and somehow or other we will calculate earnings associated with that as well and reduce your balance'

[card]

1 hour ago, Tom Poje said:

if you give out quarterly statements, do the statements indicate 'oh, by the way, you might not receive , current year allocation and somehow or other we will calculate earnings associated with that as well and reduce your balance'

One plan I've seen showed, for a fully vested employee, the contribution as a "conditional match," but also showed the entire account balance (including the conditional match and earnings) as the "Vested Balance." Then after termination prior to the end of the year, the account balance was reduced ("Forefeitures Applied") and the new reduced balance was shown as the Vested Balance.

*shaking head*

[RatherBeGolfing]

1 hour ago, Kevin C said:

Plus, part of the SCP correction is to revise your procedures to try to prevent the operational failure from happening again.  So, it should not be an on-going issue. 

I agree, it can't be an ongoing issue.  I was looking at it this as the first incident, and what can they do to correct it and then move forward. Im not advocating it as an ongoing practice.

[Bird]

3 hours ago, card said:

"If money is incorrectly deposited it is definitely ok to "take" it out of an account."

The money was not incorrectly deposited if the plan says that the contribution is made and allocated each payroll period.

There was nothing in the original or any other post to indicate this was the case.  If you were just commenting about other plans then fine.  But there is a distinction between "deposited" and "allocated" - I consider mid-year deposits in most cases to be estimated contributions that are not really "allocated" under the terms of the document at that point.  The only time they are "allocated" under the terms of the document (and therefore subject to vesting rules) is when the document says so - i.e. per payroll, per quarter, or whatever. 

[card]

"There was nothing in the original or any other post to indicate this was the case.  If you were just commenting about other plans then fine."

For the second time, I specifically asked the OP what he meant by "deposited."

On 4/22/2018 at 5:54 AM, card said:

Deposited where? What does the plan doc say? Is the contribution allocated to each participant's account each pay period (ie, reflected in their current balance, subject to forfeiture if they don't meet the allocation conditions)? If so, I agree with JamesK that this "should probably be revisited to see if there is a better way of handling matching contributions."

 

[MarZDoates]

Thanks to all for this great feedback.  I will analyze and then go from there.  

[ACK]

In response to the original question of whether a retroactive corrective amendment can be made, it cannot be made under SCP.  There are only a few reasons for corrective amendment via SCP, as discussed here, and I don't believe this situation satisfies any of these.  https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-using-a-plan-amendment-for-correction-in-the-self-correction-program

Otherwise, the corrective amendment requires a filing.