Can a plan sponsor set up an account inside a target benefit plan to h

[John A]

A plan has a target benefit contribution at year-end. The plan sponsor (employer) would like to submit a set dollar amount per month to the bank trustee to be invested. The actual allocation would still be an annual allocation but they would still like to remit funds to the trustee monthly. The money would be put into a suspense account, where the employer would direct the investments. In the case where the market takes a dive and they do not have enough in the account to allocate to all participants, they'd be required to submit additional money to cover the contribution. Would that additional money be deductible to the company? If the market went the other way and the account earned more than what was needed for the allocation, would the additional funds have to be allocated to all participants in the plan (not just those eligible for the allocation)?

Can the employer set up an account in the plan?

My suggestion has been to set up an account outside the plan, but the employer seems insistent on having the account inside the plan. Any suggestions?

[IRC401]

I don't know why advance funding would not be permitted, but if the plan funding exceeds the deduction limit the employer will be hit with an excise tax. In addition, the earnings on the suspense account would probably count against the 415 limit, but you might want to get some opinions on that issue.

[John A]

IRC401, thanks for the response.

At the risk of sounding like an exam question, anyone willing to take a shot at what should be done in the following situation?

Target Contribution calculated on 2/28/2001 for 2000 calendar year plan year:

Employee A Target Contribution by formula $ 2,000

Employee B Target Contribution by formula $ 5,000

Total Required Target Contribution by formula: $ 7,000

Employer contributed:

$3,000 on June 30, 2000, and

$2,000 on November 30, 2000 to a suspense account in the plan.

The June 30 contribution has lost $1,000 as of 2/28/2001.

The November 30 contribution has gained $400 as of 2/28/2001.

Total amount in the suspense account as of 2/28/2001 is $4,400.

All investments are employer-directed, but each participant has a separate account (assets are not pooled).

As of 2/28/2001, the employer plans to allocate the contribution to the participant’s separate accounts.

What should the employer do as of 2/28/2001 to fully accomplish the contribution and allocation for the 2000 plan year?

[Lynn Campbell]

I would say, deposit the $2,000 remaining and allocate the $7,000 contribution to participant accounts for 2000. The "loss" on the contributions is just included in the total investment gain or loss for the year and not attributable to the contributions directly.

[david rigby]

I agree with Lynn. But make sure that the $5,000 already deposited for the year is not included in the calculation of the required contribution for the current year.

[John A]

Lynn and pax, thanks for your repsonses. How does one allocate the $7,000 contribution when there is only $6,400 in the suspense account to allocate to the separate participant accounts? Or are you saying to allocate the $7,000 "on paper" and determine the allocation of the $600 loss "on paper" and then do the physical transfer based on the net result?

Also, would your responses be the same if the participant accounts were participant-directed and valued daily?

[Erik Read]

John - since you haven't gotten a response let me see if I can help some.

When prefunding you should always use as suspense account, even if the plan is daily valued.

When allocating - paper is the only way to show the full contributions, then the losses are done, and cash moves. Be sure to keep a detail of the calcualtions, when a participants see's his annual or quarterly statement showing a "Contribution" of $1500, but has never seen that amount come into his/her account, they'll probably ask questions. Be prepared to defend your work with the sponsor even though the issue resides with they're wanting to prefund the contributions.

Best situation is to invest the contributions conservativly, in Fixed Income vehicles, that are less likely to follow the ups and downs of the big market.

Also - any contributions to the suspense account = the deductions, gain's and losses cannot be made up without it resulting in additional contributions that would count in all tests.

Good Luck.