Plan with last day requirement allocates match throughout year, permi

[Guest LMalone]

May a 401(k) plan with a last day requirement for matching contributions make and allocate the match throughout the year, permit the participant to direct investment of the amount allocated, and then take it away if the participant is not employed on the last day?

Primary concerns: (1) taking away something allocated and communicated, and (2) permitting someone other than the trustee to direct the investment of funds he eventually may not be entitled to.

Thanks for any thoughts and experience.

[Guest RJM]

One method is to set up two contribution sources for each Employer contribution source subject to Last Day/Hour of Service Requirements.

Matching Contribution example:

ER Match Source 1 and ER Match Source 2

Source 1 = contributed prior year and subject to vesting schedule.

Source 2 = current year contributions and zero percent vested.

At End of Year, Participants eligible for Match have Contributions and Earnings from Source 2 transferred to Source 1. Participants not eligible for Match forfeit Source 2.

[RCK]

The answer to the original question is "sure, you can do that." The communications are certainly a challenge, particularly for statement purposes. And I think that RJM's solution is workable.

As to LMalone's primary concerns, as long as your communications are clear on what happens and what exactly is vested, then all you have is a forfeiture of non-vested contributions. And the participant would normally have investment authority over those even if not vested.

I have to admit that I don't see the point of making the match weekly but subjecting it to a last day rule. We have a guaranteed match subject to a vesting schedule and made weekly, and a profit sharing match, subject to vesting and a last day rule, and contributed after the end of the plan year. It works just fine.

RCK

[MWeddell]

Yes, this is legal. I have a client who has just recently decided to implement this design at my advice.

You obviously have to communicate to employees that even thought this amount shows on on their statements, they don't receive if they terminate before the end of the plan year. From the employees' perspective, this feels like nonvested money.

However, if you want to apply it to employees otherwise fully vested, the document will be worded to say that it is tentatively or provisionally allocated during the plan year but the final allocation isn't done until the end of the plan year.

I don't see any problem to having someone other than the trustee control the investment direction. It happens all the time with nonvested money.

The advantage is for a company currently matching each pay period but is looking for cost savings in a way that minimizes employees' negative perceptions. The match is still made each pay period but that year's match is removed only for those who terminate employment during the year. Employees can still see that the match is being funded, can still get investment earnings on it during the year, basically experience no chance unless they terminate employment during the year. (One can also make other exceptions for retirement, death, disability, etc.)

[M R Bernardin]

Do you feel the employer can deduct all contributions made during the year, or only those that are allocable to an employee who is there at the end of the year? And what do you do with the money you take away from terminated employees? They are technically not forfeitures at all.

[MWeddell]

The IRS' informal position is that unless there's authority for having a suspense account (e.g. Leveraged ESOP, 415 excess), then one can't carry a suspense account from one plan year to the next. Therefore, when someone terminates employment during the year, one uses the provisionally allocated match which no longer belongs to their account immediately to reduce the cost of the next matching contribution. That prevents the unallocated money from building up past the point where one could use it up before the end of the plan year. Hence, by the time the match is contributed for the last pay period, the goal is to have all funds allocated to employees' accounts.

[Richard Anderson]

I agree with MWeddell that the "forfeited" provisionally allocated match should be used to reduce the next matching contribution, if possible. But we have many clients who do not give us any data until after the end of the plan year. In that case all matching contributions have already been deposited, so they can't reduce the next match deposit. In this case they allocate the "forfeited" provisionally allocated match to the remaining participants as an additional discretionary match.

[Guest LMalone]

Thanks to all who responded. It is obviously not a clear cut issue.

[John A]

Is anyone aware of court cases in which participants were awarded this match because the communication was not sufficient to inform the participants of the last day requirement for the match? I seem to remember reading about cases like this in the last year or 2, but I cannot remember where.

[Guest asire2002]

I know this is an old thread, but I'd like to resurrect it on the issue of giving participants investment discretion over amounts to which they are not, and may never be, entitled to.

It occurred to me as I was thinking this through for a current situation, that if a participant exercises investment control over someone else's money, he/she is a fiduciary with respect to those other moneys. Consider the ESOP analogy, where a participant's vote can affect the way in which the shares of those who do not cast a vote are ultimately voted. And 404©, which states the participant is not a fiduciary of the plan simply by exercising investment control over his/her own account, but by implication the participant would be a fiduciary if the money were not part of his/her account.

[Guest Willie]

How do you handle the investment losses and gains on the money removed from their account? For exampe assume daily valuation: This is the first year the participant received a company match and they terminate prior to the end of the year. Due to investment losses the balance in their account is less than the actual company match that they received. Do you only remove the value of the actual match? What about gains, do you remove those when you remove the contribution?

[Guest David M. Lipkin]

I agree that "you can do that". However, I think it is poor plan design to allow this situation to occur. We typcially write plans that contribute the match periodically to have no requirement to keep the match, although a last day rule is typically used for the P/S piece.

Just a thought

[MWeddell]

The match allocated during the plan year is tentatively or provisionally allocated to the participant.

Furthermore, regardless of whether the plan complies with ERISA 404©, all of the investment choices offered by the plan must be prudent under ERISA 404(a). The fact that the participant is choosing which investment fund(s) to use among several prudent options is not particularly troublesome to me.

On the plan I worked on that implemented this idea, we remove associated gains or losses on the contributions as well if the participant ends up not satisfying the last day of the plan year requirement.

I agree that this is an unusual plan design, not what I'd typically recommend or implement.

[maverick]

Here's a different wrinkle to taking back match funded during the year:

Employer has a discretionary match that is funded with each payroll. It's now December, and oops, ER realizes he can't "afford" the match. Now he wants to recover the pre-funded match and use the money for non-plan related things. Other than a morale issue (employee sees match deposits, then the money is taken away), is this legal? I found plenty of discussion on removing the match if an employee does not meet a "1,000 hours worked " or "employed on last day" requirement, but have not had much luck in the "employer changes his mind" scenario. Thanks.

[austin3515]

IT seems to me that in 401(A) its pretty clear that it has to be "impossible" to get the money back out for the employer's use. In all the previous discussions, and likely the ones your referencing, the only option is to offset other employer contributions, or perhaps offset administrative expenses paid by the Plan.

I don't think what your asking is possible.

[EGB]

Though it appears that many agree that the pre-funding can be done, does everyone also agree that the plan document must specifcally allow the pre-funding and specifically address what will be done with gains/losses, who has investment discretion, etc.? Or, do some feel that this is an administrative issue and does not have to be specifically dealt with in the plan document; for example, assume a plan just says the employer can allocate contributions in installments or annually and says nothing else - if the plan is silent about pre-funding, then you are not doing anything that is contrary to the provisions of the plan; however, it is also something that is not really authorized by the terms of the plan.

Of course, I think everyone would agree that it is certainly best to specifically address pre-funding in the plan; my question is whether it is ok to pre-fund when the plan is silent on the issue and pre-funding would not otherwise violate the existing provisions of the plan?