Pooled Plan - Employer Contribution Funding

In 2022, a 401(k)/PSP client transferred from a pooled account to individual accounts as Vanguard.  During the first part of the year, they funded deferrals and also made additional deposits to the account which were used to fund the employer safe harbor match at year-end.  The safe harbor match amounts were not calculated based upon a specific time period or earmarked for any specific participant, This is how they had always done it and I see no harm in it.  Those employer deposits throughout the year earned money while in the pooled account.  After the transfer to Vanguard, these funds were placed in a suspense account and continued to have earnings.  The total suspense account, which was comprised of actual money deposited + earnings, was used to fund the annual safe harbor match once it had been calculated based upon full year data.

Is it ok that they use the earnings to fund the required safe harbor match contribution?  I assume they definitely cannot deduct the earnings portion because they did not deposit it, but am now questioning the use of the earnings altogether to fund the contribution.  If we were talking about forfeitures, I know those earnings are used to fund contributions all the time, but is this different?

Thanks!

I would think the gains would be allocated to the participants in proportion to their employer match.

17 hours ago, Lou S. said:

I would think the gains would be allocated to the participants in proportion to their employer match.

Right, and to clarify, earnings can not be used as contributions.

21 hours ago, 401(k)athryn said:

The safe harbor match amounts were not calculated based upon a specific time period or earmarked for any specific participant

See 1.401(m)-1(a)(2)(iii)(A).

"(A) General rule. Employer contributions are not matching contributions made on account of elective deferrals if they are contributed before the cash or deferred election is made or before the employees' performance of services with respect to which the elective deferrals are made (or when the cash that is subject to the cash or deferred elections would be currently available, if earlier). In addition, an employer contribution is not a matching contribution made on account of an employee contribution if it is contributed before the employee contribution."

A deposit for a matching contribution made before elective deferrals on which the match is based are deposited is not a matching contribution.  You may want to review the timing of the "match" deposits versus the timing of the associated salary deferrals to see if any amounts intended to be a match were pre-funded. 

Similarly, funding match amounts before it is known that the deferrals will be eligible for a match is not allowed.  This should not be an issue for a SHM but could be for plans that have allocation requirements like a last day rule or 1000 hours.

As a corollary, if the match is always funded after the deferrals are funded, there is no need to keep the match contributions in a separate account earning income.  The match should go into the participants' accounts and earn income in those accounts like any other allocated contribution.

On a separate note, if this plan has been using any earnings to satisfy part of their matching obligation, they have underfunded the match and this should be corrected.  In a similar vein, any such earnings would not be annual additions, not includable in ACP testing, or, as others have noted, deductible.

50 minutes ago, Paul I said:

A deposit for a matching contribution made before elective deferrals on which the match is based are deposited is not a matching contribution.  You may want to review the timing of the "match" deposits versus the timing of the associated salary deferrals to see if any amounts intended to be a match were pre-funded. 

Similarly, funding match amounts before it is known that the deferrals will be eligible for a match is not allowed.  This should not be an issue for a SHM but could be for plans that have allocation requirements like a last day rule or 1000 hours.

The post explained the circumstances that created this situation (pooled account converted to self-directed). I saw (see) nothing to indicate that they pre-funded the match (before deferrals). It would take an incredible amount of effort to discern that there was indeed a problem.

The OP notes that the "safe harbor match amounts were not calculated based upon a specific time period or earmarked for any specific participant".  This implies there was no linkage between the deferrals and the amount funded for the match.  We don't know how the amount of the match deposits was determined.  The easiest thing to check is whether the accumulated funding for the match without regard to earnings exceeded the calculated match at year.  If no, then probably there is no problem.  If yes, then there is a problem.  If the match funding was front-loaded during the year, then there is greater potential for a problem.  Whether the match funding was made to a pooled account or to self-directed accounts is not relevant.

19 hours ago, Paul I said:

The OP notes that the "safe harbor match amounts were not calculated based upon a specific time period or earmarked for any specific participant".  This implies there was no linkage between the deferrals and the amount funded for the match.  We don't know how the amount of the match deposits was determined.  The easiest thing to check is whether the accumulated funding for the match without regard to earnings exceeded the calculated match at year.  If no, then probably there is no problem.  If yes, then there is a problem.  If the match funding was front-loaded during the year, then there is greater potential for a problem.  Whether the match funding was made to a pooled account or to self-directed accounts is not relevant.

I don't misunderstand or disagree with any of this. It's all a side issue that may or may not be a problem.