401(k) Advance Contributions

[Guest ccipeter]

We have had inquiries f rom clients who want to make employer contributions to

their 401k & profit sharing plans - safe harbor, non-elective (pro-rata and

cross-tested), but the plans have either a 500/1000 hour and/or last day rule.

Question - how do we account for these funds when contributions may be made for

employees who do not subsequently qualify because of hours or termination. Also, if

all of the contribution are not allocated, how do we treat the excess. In those

situations were there is a gain or loss on this money, how are those elements treated.

Compound the problem with individual participant accounts into which these

contributions are deposited. Your comments please.

[LCARUSI]

Why do they want to make an advance contribution? If they wait until they determine which employees are eligible (after the end of the current year), they can make the contribution at that time and still get a curent year tax deduction assuming they make the contribution prior to the 404 deadline.

[Erik Read]

If the employer is wanting to "pre-fund" the PS and Match amounts because of cash flows, one alternative is to have them set aside the $'s they would have put into the plan and use that to fund the contribution once it has been calculated. That will avoid potential cash shortages, and not create any admin nightmares for the recordkeeper and administrators.

Keep in mind - the account would be a corporate account - not a plan account, and they cannot make the mistake of putting deferral dollars there at any point in time!

Good Luck!

[Guest JimD]

If the plan has an allocation accrual requirement you cannot allocate a contribution to a participant until they have met those requirements. You must follow the plan provisions. If they want the contribution allocated more frequently they have to amend the plan. Another reason I've heard from employers who want to do this is that they can "dollar cost average" the investments. I think its possible in some situations to make the contribution to the trust fund and invest it without allocating it to a participant. But in a daily valued participant directed plan

its probably not doable.