Last Day Rule for Match

There were a couple of threads on this subject back in 2000 but nothing since. Maybe that means it's settled law now. But here's the scenario. 401(k) plan applies the last day rule to the company match. It matches employee contributions each payroll period, but the match is placed (real dollars) in a "conditional match" subaccount within the employee's plan account. The employee has investment control over the subaccount, which accrues gains and losses. If the employee is not employed on the last day of the year, the subaccount is "forfeited." Back in the 2000 threads this was deemed perfectly acceptable, as long as the employee communications were clear. Is this plan design accepted practice now? I might argue on behalf of an otherwise 100% vested employee that his/her accrued benefit includes any amount allocated to the account, that there is no provision anywhere for "conditional allocations," that once real dollars are allocated to the subaccount they become part of the employee's accrued benefit, and that removing funds from the subaccount is a prohibited forfeiture under section 411. but I could be wrong...

I don't think it is a prohibited forfeiture but it is an awkward plan design that requires a plan to define how things should happen as far as timing, movement of monies and recognition of gains/losses that seem incredibly administratively intensive.  I won't work on a plan that does what you describe unless I'm doing a favor for very good friend and even then I'd try my best to talk them out of the design.

What Mike said.

One other issue I'd possibly be concerned about (and admittedly this may be a stretch) is a possible breach of fiduciary duty. PARTICIPANTS are being allowed to direct investment of plan funds to which they are not yet entitled. To me, this is different than someone who just isn't 100% vested in their account. Again, as Mike said, the whole thing is a very bad idea.

Is it enough for the plan's trustee to allow the participant's fund choices (on technically-not-yet-allocated-to-them money), under presumption that the balance would indeed be theirs eventually, and therefore it's "prudent" to agree to that particular participant's fund lineup?

I think the fiduciary issue is an interesting one, but I'm still struggling with the allocation issue. Bri referred to the "technically-not-yet-allocated-to-them money." But cash has been allocated to the participant's account. Where are the rules that permit a "contingent allocation?" and where are the rules that allow a suspense account for those contributions that are ultimately "forfeited?" (btw this employer refers to the reduction as a "forfeiture.")

The employer could have just adopted an end of year match to accomplish the same result.

Thanks for all the input.

card

Seems to be no different (economically, at least) than allowing a not-yet-100%-vested participant to direct investments in the non-vested portion of their account, which certainly could be forfeited.

17 minutes ago, acm_acm said:

Seems to be no different (economically, at least) than allowing a not-yet-100%-vested participant to direct investments in the non-vested portion of their account, which certainly could be forfeited.

But those non-vested assets are allocated to a specific participant.

In this situation, the amounts are contributed to the plan throughout the year but aren't really allocated until the last day of the plan year. The result is that if anybody terms prior to the end of the plan year, the employer has made (and pre-funded!) a contribution that isn't allocated to anybody, which is frowned on.

Note that we face the same issues with pure profit sharing plans with fbo accounts and contributions made before the end of the plan year. I've harped on this issue from just about every angle: employer contributions made before the end of the plan year are disasters waiting to happen (unless associated with specific instructions received from the plan's TPA or actuary).

Agree with all the priors and will add that I don't think this is now accepted practice. Just something really weird that someone didn't think through that probably will be OK with IRS on exam, but probably not in any preapproved documents, so in absence of dl's for individually designed plans would be concerned. Also, again even if upheld, the litigation and HR risk is so huge it overwhelms any perceived advantage.

21 hours ago, duckthing said:

But those non-vested assets are allocated to a specific participant.

In this situation, the amounts are contributed to the plan throughout the year but aren't really allocated until the last day of the plan year. The result is that if anybody terms prior to the end of the plan year, the employer has made (and pre-funded!) a contribution that isn't allocated to anybody, which is frowned on.

Can't that year's match assets be assigned to the participant, but classified as "not vested" until the participant reaches the EOPY???  Would need plan language, of course, but seems like it is certainly allowable - assuming class vesting of employer contributions is still allowed.

But I also agree with Luke Bailey above - why even do it?  Seems like asking for misunderstandings and trouble.

10 minutes ago, acm_acm said:

Can't that year's match assets be assigned to the participant, but classified as "not vested" until the participant reaches the EOPY???  Would need plan language, of course, but seems like it is certainly allowable - assuming class vesting of employer contributions is still allowed.

The vesting schedule would still need to meet the minimum required by PPA. How would you justify forfeiting a matching contribution to somebody with 10 years of vesting service?

Even if you could, presumably the sponsor would want to have the money available in a forfeiture or suspense account right away. With this approach, it would be 'locked up' until a distributable event occurs, which could be years away depending on what the Plan says about forfeitures.

Class vesting has been forbidden for a loooooooooooooooooong time.

23 hours ago, card said:

I think the fiduciary issue is an interesting one, but I'm still struggling with the allocation issue. Bri referred to the "technically-not-yet-allocated-to-them money." But cash has been allocated to the participant's account. Where are the rules that permit a "contingent allocation?" and where are the rules that allow a suspense account for those contributions that are ultimately "forfeited?" (btw this employer refers to the reduction as a "forfeiture.")

The employer could have just adopted an end of year match to accomplish the same result.

Thanks for all the input.

card

I think I take issue with your term "contingent allocation" as it service no legit purpose and is causing your confusion.  You are correct there is no such thing.  Per the plan document either the amounts are allocated or they aren't.  So to me the real question is merely depositing the funds into an account that bears someone's name an "allocation" or not? 

It isn't an allocation per the plan document. 

Maybe it is because I come out of a mostly balance forward world but I have seen plenty of times when an employer would deposit funds into a balance forward trust during the year and then those amounts would get allocated. 

While there is a person's name associated with where the funds are put are they allocated or merely deposited?  If merely deposited then I don't see an issue.  And I do think the funds are merely deposited as the plan terms have not said the funds are allocated. 

I think this is a silly thing to do for all the reasons this thread is giving but I think you can make the case the funds aren't allocated.  So you can take them out of the account not because it is a forfeiture but because it was never allocated to the person.

Thanks ESOP guy. what would you say if the SPD said this?

Still not sure "your" makes the match allocated per the plan document.  Even if the plan document says it is deposited into "your" conditional account.  The allocation provisions are going to tell you when a person has earned a right to the benefit.

Let me be clear I am using what I think is logic here and plan law isn't always logical but to me a reasonable reading of the document says this isn't allocated. 

All plan documents have a provision that allows the PA to interpret the document in a reasonable way that is non-discriminatory.  We use that plan language more in the ESOP world (I used to do both 4ks and ESOPs now pretty much just ESOPs) as there simply are more unique sets of facts that seem to come up.  I don't think you are going to find a regulation one way or another.  Maybe whoever thought this up wrote the plan to think of these things.  But absent real clear provisions to the contrary I don't see an allocation.  The person has not earned a right to the benefits until the allocation provisions have been met.  I think that can be seen as a reasonable non-discriminatory take on the plan document as it is understood in this conversation.   

If they insist on making the deposits before the end of the year, why not deposit to an unallocated account rather than to the individual participants?