Deposit Match/PS early for HCE but later for NHCE

We have a client where a partner wants to deposit his $63k 415 limit  in January of 2020. His comp will be way more than the max and we'll for sure pass all testing when the year end arrives. Question is that because he is a HCE, can we "fund" his employer contributions before the NHCE's are funded? Or is the only requirement that all employer be funded by tax return due date?

if you have access to EOB, check out Chapter 3A, Section II, Part G, 5.b.

perfect thanks

On ‎1‎/‎9‎/‎2020 at 1:41 PM, Doghouse said:

if you have access to EOB, check out Chapter 3A, Section II, Part G, 5.b.

I don't. What does it say? I understand it's perfect.

It is a discrimination issue under 401(a)(4) as well as an operational violation - failure to follow the terms of the plan with respect to allocations.  

I always hesitate to copy and paste from the EOB due to copyright considerations. 

Can you summarize? It seems like the practice would be discriminatory, e.g. BRF discrimination, but my recollection is that years ago when I raised this with an actuary she was able to point to a provision in the regs that seemed to say it was OK, along the lines of the timing of contributions was not a BRF or something like that. I looked for the provision more recently and could not find it, which is why I ask. If the EOB references a piece of guidance, that guidance is in the public domain, so you could just give the reg cite.

Someone else in the office is using that volume of the EOB at the moment, so I can't quote it, but I should think that 1.401(a)(4)-1(c)(8) would prohibit this. Also fails the smell test...

For a participant-directed plan it clearly would be a problem. The right to direct investments is explicitly named in the regs as an example of a BRF - see 1.401(a)(4)-4(e)(3)(iii)(B). If the HCE gets their contributions on one day and the non-HCE gets theirs some time later, then only the HCE has the right to direct their investments during the intervening period, and current availability would not be satisfied with respect to the right to direct investments if tested on any date during that period.

For a pooled account, I think you can argue it is ok, as long as the earnings are allocated in a non-discriminatory way.

For others that see this topic later.....

The EOB section mentioned above is contextually speaking of the owner/HCE depositing their profit sharing early in the year, not after the year end.  Example, owner deposits profit sharing in March 2020 for year end 2020.

4 hours ago, Belgarath said:

Someone else in the office is using that volume of the EOB at the moment, so I can't quote it, but I should think that 1.401(a)(4)-1(c)(8) would prohibit this. Also fails the smell test...

Agree that has a problem with smell test, but 1.401(a)(4)-1(c)(8) does not hit the nail on head for me.

4 hours ago, C. B. Zeller said:

For a participant-directed plan it clearly would be a problem. The right to direct investments is explicitly named in the regs as an example of a BRF - see 1.401(a)(4)-4(e)(3)(iii)(B). If the HCE gets their contributions on one day and the non-HCE gets theirs some time later, then only the HCE has the right to direct their investments during the intervening period, and current availability would not be satisfied with respect to the right to direct investments if tested on any date during that period.

For a pooled account, I think you can argue it is ok, as long as the earnings are allocated in a non-discriminatory way.

No, wait a minute. They all have a right to direct investments. Let me give you an example. Suppose you have a medical group that is a partnership. The estimated profit sharing is withheld from partner draws on a monthly or quarterly basis and deposited into partners' individual, self-directed accounts monthly or quarterly, while the nonelective for staff is contributed and allocated to the staff members' individual self-directed accounts after end of year. But they all have the same mutual fund menu and invest under same rules.

Have you ever seen a document that provided/allowed such a contribution to be allocated only the HCE's? Even if the citation doesn't convince you, I find it hard to imagine that most (if any) IRS pre-approved documents, which is what are nearly always used these days, would allow this. So even if you are convinced it is otherwise allowable, check your document language very carefully.

We've been asked the same question before by a group of doctors, and our answer was a resounding rejection.

Also, if the first citation is unconvincing to you, so that you move past it to the next step, then an allocation DATE is something I'd argue is an "other right or feature." Although the regulations don't specifically list this (unless I skimmed over it - entirely possible possible!) under 1.401(a)(4)-4(e)(iii) examples, it does say "Other rights and features include, but are not limited to)" 

That's my basic take on it all, and I'm "stickin' to it." I sure as heck would not want to try to defend such an allocation procedure if questioned on audit, and I wouldn't waste any time looking for a way to try to get around it. I guess what I'm really getting at is I think it is easy (and correct) to not allow it, and I think it is difficult, if not incorrect and impossible) to reasonably defend it. Sorry if this seems blunt - I'm a little Grumpy this morning. Or Sleepy, or one of those Dwarfs...

13 hours ago, Luke Bailey said:

No, wait a minute. They all have a right to direct investments. Let me give you an example. Suppose you have a medical group that is a partnership. The estimated profit sharing is withheld from partner draws on a monthly or quarterly basis and deposited into partners' individual, self-directed accounts monthly or quarterly, while the nonelective for staff is contributed and allocated to the staff members' individual self-directed accounts after end of year. But they all have the same mutual fund menu and invest under same rules.

Going off the 404(c) requirements (since as far as I am aware the Code doesn't define "right to direct investments") a participant must have i) the opportunity to exercise control, and ii) the ability to select from a broad menu of investment alternatives. As you mention (ii) is satisfied, however (i) is not until the contribution is actually deposited.