I have an interesting situation. We prepare a year end valuation showing employee deferrals in a deferral account and employer contributions in an employer account. The next year, the employer wants to move the employee deferrals from the deferral account into the employer account for all employees who are 100% vested in employer accounts. The employer says that this is for investment purposes. My question is this: Do all of the employee deferrals have to be reported separately each year to participants? The Document says that each year deferrals will be allocated to the Employee Deferral Account. This is done, but then the funds are moved in subsequent years. Just doesn't "feel" right to me.

Any plan document I have seen provides for separate accounting of elective deferrals. This doesn't mean on a year by year basis, but throughout the life of the plan.

What would this employer do if they wanted to implement hardship withdrawals? How would they track elective deferrals? Also, how would you know if the special 401(k) distribution rules were met if there was no separate tracking. Vesting is not the only issue in tracking the sources separate.