Amending a plan to forfeit immediately instead of holding forfeited ba
Posted 25 August 2000 - 12:36 PM
The plan sponsor wants to amend this provision to forfeit balances upon the earlier of 5 years or when the vested balance is distributed.
Once this amendment is adopted, are we able to forfeit all those old balances immediately? Forfeitures are reallocated at year-end (12/31). It just seems a little odd to me that all the forfeitures from the last 5 years will be reallocated in one plan year. Does the amendment have to be effective prospectively? Are there any 411(d)(6) or 401(a)(4) issues to worry about?
Posted 26 August 2000 - 10:20 PM
(1) If the plan is terminated before all of the pre-amendment terminees have a five year break in service, you might need to vest anyone who hasn't had a five year break in serivce.
(2) If the amendment is made at a time that an unusually large portion of the forfeitures are allocated to HCEs, there might be a discrimination issue.
NB: If you restate the plan for GUST, be careful about effective dates.
Posted 27 November 2001 - 01:25 PM
Posted 27 November 2001 - 01:39 PM
Clarification, the forfeiture does not occur when a participant terminates (unless he or she is 0% vested); it occurs when they receive the vested portion of their account balance.
I don't have a cite, but I know it's out there (probably under Code Section 411 or the Regs for 411).
The IRS approves plan documents daily that have the immediate forfeiture provision. I would say at least 90% of defined contribution plans have this provision rather than the 5-year wait.
Posted 27 November 2001 - 02:19 PM
Thanks for your response. Please clarify your post:
I understand and agree that the IRS approves plans that immediatly apply a forfeiture in the case where the participant receives a distribution upon termination of employment.
However, what happens in the case where the participant in 60% vested, terminates and does not take a distribution. In that case, may the plan immediately use the 40% nonvested portion and apply it as a forfeiture or must the plan wait five years?
Posted 27 November 2001 - 02:30 PM
In your example, the plan cannot forfeit the 40% until the participant actually receives the distribution. Most plan documents read something like this:
Forfeitures will occur the earlier of (a) when the vested account balance is distributed to the participant or (B) 5 consecutive one year breaks-in-service.
They usually add that if the participant is 0% vested, the forfeiture occurs at the time of termination.
Posted 27 November 2001 - 03:24 PM
In the case where the participant terminates employment and does not take a distribution, there is no doubt that a "Forfeiture" cannot take place until five years after the participant terminates.
However, the question is MAY a plan use the 40% nonvested portion immediately (say, to reduce the employer's matching contribution obligation) upon the participant's termination of employment. (In the event the participant returns within five years, the plan will return the $$ to his or her account.)