Employer contributes to profit-sharing plan before year-end; plan has

[DP]

We have a Profit Sharing Plan with a last day rule. Each employee self directs his own account. The employer prefunds the employer contribution quarterly directly into each participant's account. There have been occasions where we had to remove a contribution from a participant's account at the end of the year since the participant terminated employment prior to the end of the year.

We keep getting conflicting reports from various sources. Some say we are not allowed to remove contributions already deposited into a participant's account. Others say this is not a problem if it is explained to the participant. Which is correct?

[Erik Read]

I'm not sure that I want to answer your question directly, I think you ought to refer to Legal council for an expert opinion.

I would however like to offer an alternative. If the employer would like to continue funding the contribution quarterly, put those funds in a seperate account, and amend the document that participants direct existing balances and/or deferrals (if you have a 401(k)). The issue stems with what your doing with the money you remove from the participant. If that money is leaving the plan - IMO - you have a problem. If all your doing is redirecting it among existing accounts you may not have an issue. Other opinions will vary, and your best bet is to get an expert opinion letter drafted in regard to the specific situation.

Good luck.

[Alan Simpson]

What would you do if the investments in the account take a nosedive? For example (yes I know the example is extreme but it illustrates my point):

Beginning Balance of $1,000

P/S Contribution of $1,000 put into account at quarter end

Earnings from Investments of $-1,000.00 (account lost 50%)

New account balance $1,000.00

Now, if the PS is not actually due to the Employee would you take out the $1,000 or only the $500? If you only take out $500, then you are not giving the Employees who are due the PS their appropriate amount or are making them suffer for the investment designation of the termianted Employee.

When we get PS contributions to plans with a year-end requirement we place it in a money market account for the plan and allocate it and the earnings at the end of the year. Yes, the participant may "lose" out on some earnings, but then again, the money didn't have to be deposited into the plan until the tax filing date for the Employer.

[Kristina]

Wouldn't it be nice if the Employer's actions and intentions were actually covered in the plan document so that you could point out to him that last day/1000 hour language does not tie to periodic contributions and periodic contributions do not tie to an annual allocation formula.

[PMC]

Once allocated to a participant's account, isn't it a violation of 1.411(a)-4(a) to "unallocate" that amount, and generally why with plans that have any restrictions tied to who receives the allocation, the contribution is "allocated" annually?

[Erik Read]

IMO - I don't think you'd have a violation of 1.411(a)-4(a) - the benefit hasn't "accrued" by the terms of the document, so it's not subject to "nonforfeit".