Can I Pre-Fund a Matching Contribution for a Participant Who Terminated Employment?

DWC | 08/1/17

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Facts

Our company sponsors a safe harbor 401(k) plan that provides for a dollar-for-dollar match up to 4% of pay. At the end of each year, we calculate the total matching contribution, and we usually make the deposit in the late summer. For example, we deposit the matching contribution for 2017 in August or early September of 2018.

Question

If we have a participant who is entitled to a matching contribution and terminates employment before the end of the year, is it ok for us to deposit that one person’s matching contribution when they terminate but still hold off on depositing everyone else’s match for this year until August of next year? That would allow the departing employee to take a full distribution of his or her account immediately rather than having to go through the distribution process a second time next year.

Answer

There are two perspectives to consider in answering this question — the compliance perspective and the process perspective.

From a compliance point of view, this shouldn’t be a problem if the terminating participant is not a highly compensated employee. Otherwise, it could be considered discriminatory.

From a process standpoint, if you do pre-fund the matching contribution for a single individual, it is critical that you have a mechanism in place to track it so that you remember it when it comes time to deposit the rest of the match for everyone else next summer. Otherwise, you could accidentally deposit the match for that person a second time.

It is important to note that this type of pre-funding is not permitted if the plan imposes additional allocation requirements to share in the company contribution such as a requirement to be employed on the last day of the year. Safe harbor contributions cannot be subject to that type of requirement, but regular (non-safe harbor) matching contributions and profit sharing contributions can be.

For more information on the deadlines for depositing company contributions, please visit our Knowledge Center here.

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Topics: Safe Harbor, Question of the Week, DWC, Deposit Deadlines

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.