BenefitsLink logo
EmployeeBenefitsJobs logo
Get the BenefitsLink app for iPhone and iPad LinkedIn
Twitter
Facebook
Search the News


Featured Jobs
Client Relationship Manager
Senior Plan Administrator
Retirement Plan Services Administrator
Account Manager
Client Service Manager
Client Service Manager
Vice-President of Sales
Compliance Manager
Retirement Plan Administrator
Search all jobs
 

 
 
 

Jump to content


Photo

Forfeiture Account Use


  • Please log in to reply
8 replies to this topic

#1 etu22

etu22

    Registered User

  • Registered
  • 8 posts

Posted 09 March 2004 - 10:31 AM

I also have a question on the forfeiture and how long do I have until I cannot use what is in the account towards Employer Contributions. For instance:

We have x$ amt in the forfeiture account from 2003 and can use it towards fees or Employer Contributions. I just completed my February Employer Match and would like to allocate the forfeiture funds to cover the Employer Match. However, since we will still have a balance in the forfeiture account afterwards, I'd like to use it again next month when I do the March Employer Match. Is this possible even after the first month or two of 2004 has gone by?

Also, the balance in our forfeiture account contains monies that were from 2002. Would I be able to use those monies for 2004 expenses as well?

Our client manager has given us information, but I'm still not comfortable with everything. I want something in writing from him as to the proper procedures and timelines, and I'm not getting that. it seems this is a gray area

Thank you for your help!
Elisa

#2 Bud

Bud

    Registered User

  • Registered
  • 89 posts

Posted 09 March 2004 - 10:58 AM

First of all, unvested benefits become forfeitures when the participanted receives a distribution or incurs a permanent break in service. I gather from your message that your plan document allows you to use forfeitures to pay expenses or reduce employer contributions.

All assets of a DC plan must be allocated to a participant account or used to pay plan expenses. You can't have a forfeiture account floating unused from one year to the next. It has to be allocated or it's not a DC plan.

The 2002 forfeitures should have been used in 2003. If you allocate it now, it should be allocated among 2003 participants.

#3 FundeK

FundeK

    Registered User

  • Registered
  • 357 posts

Posted 09 March 2004 - 11:09 AM

First, I will ask, what does the plan document say regarding the timing of use of forfeitures?

Most plans that I administer are able to use forfeitures in the year immediately following the year in which the forfeiture occurred. So, for the 2004 plan year, I would look at the forfeiture account balance as of 12/31/03. If that balance was $5,000 I could use the entire $5,000 any time during the 2004 plan year, which may be $1,000 per month until it is used, or $5,000 all at once. If at the end of the year, a $ amount still has not been used, the document could state that the forfeitures must be allocated to all participants in the plan.

I also have seen plans that require the forfeitures to be held for up to 5 years before they can be used or plans that allow forfeitures to be used as soon as they hit the forfeiture account.

#4 etu22

etu22

    Registered User

  • Registered
  • 8 posts

Posted 09 March 2004 - 12:47 PM

The plan document does state we can use it to offset payment of Plan Fees or Employer Contributions. " The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's Contribution, if any, for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate any contributions as follows: "Fofeitures of matching contributions will be allocated to all Participants eligible to share in the matching allocations (regardless of whether a Participant elected any salary reductions) in proportion to each such Participant's Compensation for the year."

I've heard that since these monies that are in the forfeiture account are now the Company's monies, we can use/redirect those funds to other employees to cover for our Employer Match, regardless of their status with the company during that plan year the funds came from.

The last account statement in 2003 I received might include both 2002 and 2003 balances, according to our Client Manager. However, as I mentioned before, I also heard, regardless of the plan years, I can use that money in the forfeiture account in its entirety.

It seems from the answers I've received so far here and by others that the procedures can truly vary. Some are saying the forfeiture account must be used year to year and others are saying that it can be carried over into the following year.

Sorry for the long winded message, but just wanted to provide as much info as possible and make the proper conclusion of what I have to do.

thank you for your help!

#5 FundeK

FundeK

    Registered User

  • Registered
  • 357 posts

Posted 09 March 2004 - 02:09 PM

: "Fofeitures of matching contributions will be allocated to all Participants eligible to share in the matching allocations (regardless of whether a Participant elected any salary reductions) in proportion to each such Participant's Compensation for the year."


The snippet from the plan that you quoted sounds to me like the forfeitures are to be reallocated. Where are you reading that the forfeitures can be used to pay expenses or offset the ER contribution?

#6 four01kman

four01kman

    Registered User

  • Registered
  • 243 posts

Posted 09 March 2004 - 03:13 PM

Generally speaking, forfeitures of a participant's account are to be used for the plan specified purposes after the participant has incurred a "break in service". As discussed in earlier posts, this could be as early as the year in which the participant terminated or as late as the completion of 5 consecutive 1- year breaks. Not to belabor the "what does the document say", but that should be your guide as to when the forfeiture becomes "available" to either reduce company contributions or pay expenses (depending on the document).
Jim Geld

#7 etu22

etu22

    Registered User

  • Registered
  • 8 posts

Posted 09 March 2004 - 04:02 PM

All the gray areas is what drives me a little crazy. I've been looking through the document more and more and am starting to understand it better. However, without prior knowledge of 401k plans, a lot of it is greek to me. We want to rely on our Client Manager to guide us, but I am still not too sure whether what we do for the 2002 funds will be compliant.

Here is another part of the plan document that I believe is supposed to answer my questions:

"On or before each Anniversary Date any amounts which became Forfeitures may be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 3.7(d), used to satisfy any contribution that may be required pursuant to Section 3.5 and/or 6.9, or used to pay any administrative expenses of the Plan. The remaining Forfeitures, if any, shall be treated in accordance with the Adoption Agreement. If no election is made in the Adoption Agreement, any remaining Forfeitures will be used to reduce any future Employer contributions under the Plan.

and here is the kicker that gets me,

"Regardless of the preceeding sentences in the event the allocation of Forfeitures provided herin shall cause the annual additions (as defined in Section 4.4.) to any Participant's Account to exceed the amount allowable by the Code, an adjustment shall be made in accordance with Section 4.5. Except, however, a Participant shall only be eligible to share in the allocations of Forfeitures for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a contributions is required pursuant to Section 4.3(f)."

So, I do thank you for reading my posts and providing some valuable feedback to me. I may not know what I'm doing now, but I hope down the line I can understand this more. I also hope to someday help others with their questions, too!

:(

#8 Bud

Bud

    Registered User

  • Registered
  • 89 posts

Posted 09 March 2004 - 05:03 PM

Your fiduciary duty to follow the plan document is limited to those occassions when it is not contrary to the law, under ERISA 404(a). If the law and the plan document say different things, you should follow the law.

The courts in Herrmann v. E.W. Wylie Corp. and Bouchard v. Crystal Coin Shop, Inc. held that terminating service is not enough to turn unvested benefits into forfeitures. The courts said you also need either a distribution or a break in service. Those cases were decided before Code Section 411 was amended to provide for permanent breaks in service.

#9 etu22

etu22

    Registered User

  • Registered
  • 8 posts

Posted 09 March 2004 - 05:14 PM

Luckily, thefunds in our Forfeiture account are from distributions when the former employees rolled out their plan.

thanks again. This has been a great help.