PS with a last day of plan year and employed on determination date

Plan document has 1000 hours/last day rule for the PS contribution.  In addition, they have an appendix in the plan document that says you must be employed on the "determination" date which is usually in February after the plan year ends.  We have told them this is not possible.  

For 2022, they got mad and decided not to fund for the 2022 plan year.  However, they have now decided to fund a contribution for the 2023 plan year as of February 2023 based on 2022 wages.  We have told them this is creates issues.  They have been told that they will need to true up the calculation at the end of the year based on 2023 wages.   In addition, they will need to forfeit any contribution that went to a terminated participant.  If the terminate participant took a distribution, they would likely need to recovery that money.  

What other problems will the plan face with "prefunding" this contribution? 

This situation typically comes up when the company does not want to give a PS contribution to an employee who terminated employment after the close of the plan year and before the contribution is funded.  All too often, it is an emotional decision depending upon the company's relationship with the individual employees.  If the employee is a long-term, loyal employee who terminates in January, they likely will want to give the employee a contribution.  If the employee ran off with the petty cash box and was fired in January, they almost certainly do not want to give the employee a contribution.  But we all know we have to follow the plan document.

It likely is possible to craft allocation conditions that are definitely determinable that uses prior year compensation in the allocation basis.  The contribution would still be a current year contribution but would not involve any current year true-up or end-of-year claw backs.

If they skipped a year's contribution for 2022 because they got mad, it sounds like they follow the petulant child style of management.  If you create a contorted plan design that accomplishes what they want, that design likely will disappoint them again in the future.   Good luck!

If an employer was dead set on contributing during the year, I recall a popular conservative approach, after caveating all of the pitfalls mentioned, was to tell them to contribute no more than 50% of what they contributed in the prior year (or in this case what would've been the 2022 contribution) unless they inform you that the demographics will substantially change by 12/31/23.  I agree that amending to allow allocations based on prior year comps should be avoided if possible.   

This sounds like a discussion posted not that long ago - is it the same situation? I have no current year (2022) solution, sorry, but I thought the group came to a consensus that amending the allocation formula to individual allocation groups would enable the employer to accomplish its objective of excluding employees not employed on the contribution determination date (or deposit date or however else they wanted). Assuming the number of exclusions did not create a coverage problem, if the profit sharing was a uniform percentage of pay there would be no testing issues.

My advice would be to tell them to follow the terms of the plan document and not to try to do something "funny."  The doc should spell out the "definitely determinable" rules.  Amend prospectively only -- no cutback.  Sounds like this is a customer you don't need, and should dump, absent some legal, contractual obligation or an ethical problem for you to abandon at this stage.  The being "mad" part makes no sense--not a business rationale.

If you continue with this client, make and keep records of the written advice you provide. Your descriptions of the client’s behavior suggest the client might assert it did not receive, or did not understand, your advice.

I would look in the plan doc to see if "determination" date really means what they think it means.

I don't think it could mean "whenever the Employer determines they want to make a contribution."