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Reallocation of forfeitures

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5 replies to this topic

#1 AJ North

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Posted 18 April 2012 - 11:14 AM

I have a question concerning the allocation of plan forfeitures. The plan in question reallocates plan forfeitures back to participants:

1. The reallocation is only to participants who have made a 401(k) contribution for the plan year. Based on this, I would understand that the forfeiture reallocation would be considered a match due to receiving an allocation is conditioned on the participant making a 401(k) contribution. Therefore, the reallocated forfeitures should be tested in ACP.

2. The allocation formula of the forfeiture is based on the ratio of compensation the participant has in relation to the total compensation of the other eligible participants.

I donít think that I have come across a match allocated on a comp to comp basis before. Iím thinking that since it is not based on the deferral amount, I may have a coverage/ rate group-testing situation here.

Am I reading too much in this situation, seeing problems where they might not exist? Any comments to clear up my thinking would be most welcome.

#2 ETA Consulting LLC

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Posted 18 April 2012 - 11:35 AM

You're reading a little too much, but not necessarily.

You are correct that the definition of a match is a contribution made due to a "Deferral or Employee Contribution". So, the amount would be tested under ACP.

As for your second point, there are two potential issues: 1) the allocation must be pursuant to a definitely determinable formula. It is conceivable that a match is allocated "comp to total comp" for only those who defer. 2) Other than ACP, is there any other non-discrimination test that would apply for such a match?

I would say that this should be tested with respect to a non-discriminatory rate of match. I am not sure, however, if there is a mathematical possibility that this test would fail under this formula (which may become a moot point).

Good Luck!

#3 AJ North

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Posted 18 April 2012 - 12:39 PM

Thank you for your response, ETK. I guess my thought here is that a comp to comp formula is a safe harbor allocation for a PS contribution, but that is not what I have here. To the extent that this allocation is a match, it does not directly relate to the amount of deferral and that is were I am leary. For example an HCE could defer a dollar and get a larger allocation of the forfeiture than a NHCE who defers the 402(g) limit because the match is based on comp not the deferral amount. I'm thinking that I have some sort of rate group(s) here and I am not sure that the ACP test is the only non-discrimination test that needs to be run.

#4 FormsRstillmylife


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Posted 18 April 2012 - 04:44 PM

You also must do 401(a)(4) testing. Actually all matching contributions are subject to this, but generally the allocation formula addresses the issue. See Regulation section 1.401(m)-1(a)((1)(ii). I believe you can justify the comp to comp formula as constituting one level of matching contribution.

(ii)Testing benefits, rights and features.ó

A plan that provides for employee contributions or matching contributions must satisfy the requirements of section 401(a)(4) relating to benefits, rights and features in addition to the requirement regarding amounts described in paragraph (a)(1)(i) of this section. For example, the right to make each level of employee contributions and the right to each level of matching contributions under the plan are benefits, rights or features subject to the requirements of section 401(a)(4). See ß1.401(a)(4)-4(e)(3)(i) and (iii)(F) through (G).

#5 AJ North

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Posted 19 April 2012 - 10:25 AM

Thanks for responding Forms and confirming my feeling that the ACP test was not the only testing that needed to be done on this kind of forfeiture reallocation formula.

Why do plan sponsors choose provisions that only complicate an already complicated issue?

#6 K2retire


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Posted 19 April 2012 - 12:39 PM

Why do plan sponsors choose provisions that only complicate an already complicated issue?

Because what makes sense to a business owner and what makes sense to the regulatory folks have a major disconnect!