401(k) plan requires at least 1,000 hours for share of nonelective con

[Scott]

If a 401(k) plan provides that an employee must work 1,000 hours in a plan year to share in the employer's non-elective contribution for the year, can the non-elective contributions be paid to the trust and allocated to every participant's account each quarter during the year, and then forfeited at the end of the year from the accounts of the participants who did not satisfy the 1,000 hour requirement?

[davef]

I've seen plans that do this and it turns into a communications issue at the end of the year, especially if these amounts show up on quarterly statements. It's important to clearly mention on the statements that the allocations are conditioned upon completing 1000 hours. It seems to me that you run into less problems if the money is deposited and invested by the employer during the year, but not actually allocated until year-end. For example, if an employee quits without completing 1000 hours and requests a distribution, someone needs to know to back out the "allocations" before making the payment. If allocations are not made until the end of the year, you don't have this problem.

[R. Butler]

I would not allocate the nonelective contribution at the participant level until year end. If the participant never completed the 1,000 hours is it really a forfeiture? This may be an issue if forfeitures reallocate. There is a possible issue regarding the timing of forfeitures. When do forfeitures arise under your document? Is it the earlier of payout or 5 years break? What if the participant had not been paid out?

It definitely would be an issue if participant is rehired and the document has a forfeiture restoration provision that is triggered?

[davef]

I would argue that this is not really a forfeiture because the participant was never entitled to the money to begin with. These are not the same a nonvested account balances. Any amounts that were previously "allocated" to someone who quits before completing 1,000 hours would be used to reduce future employer contributions for the year. I don't believe that plan provisions on the timing of forfeitures or how forfeitures are used would be relevant in this instance.

[R. Butler]

I may have misunderstood the question. However, if the plan is not really treating as the match "forfeiture" but merely taking it away from the participant, the answer still does not change. A couple of concerns.

1. Where does the money go? It should not revert to the employer. Possibly could reallocate, but limits in the document or elsewhere may not make reallocation feasible.

2. If you can reallocate. What do you do with the earnings on the contrib? They shouldn't really shouldn't stay with the participant. If there is a loss what do you do? If accounts are self directed you shouldn't allocate the loss to other participants.

I just wouldn't allocate on the participant level during the year in this situation.

[Guest Kevin Plymyer]

The plan document should give directions as to how the contribution is calculated, as well as when to allocate such a contribution. If the plan document does not allow you to allocate the non-elective contribution each quarter then I think you would be in violation of the plan document by doing so. I also think that davef has a point, "the participant was never intitled to the money". If you allocate money to a participant who never completed the 1000hrs you may have an operational defect.

[Kristina]

Alright Kevin!!

If your plan document does not provide for quarterly allocations of the employer contribution, then quarterly allocations can not be done. To do so would be a defect.

If your plan document allows for quarterly allocation of the employer non-elective contribution and requires 1,000 hours to receive the allocation, then your document was very, very poorly drafted. And you have a contradictory document where the earliest one would be able to allocate on a quarterly basis would be the second quarter of the plan year assuming that all employees work 40 hours a week.

[Guest michaelv]

Assuming the document allows for quarterly allocations and the sponsor still wants to go ahead with it, determining how to actually allocate the contribution could cause headaches. It seems like a lot of work to do an allocation (even if it's a pro-rata allocation) 4 times a year, knowing that in the end you'll have to make adjustments for the <1000 hour people. As someone hinted at before, I would think that earnings on the withdrawn money should come out too.

Couldn't the sponsor just put the money in an unallocated account during the year, allowing earnings to build up, and then allocate once after PYE? The earnings on this money could be allocated in a non-discriminatory manner as well.