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Unallocated forfeitures


30Rock

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We have a plan that has unallocated forfeiture money even though the plan was frozen as of 12/31/2007. I assume the amendment did not address forfeitures and neither did the recordkeeping system. At this point, should they be reallocated, and how? To all participants with an account on 12/31/2007 even if they have by now taken a distribution, or can we look at active accounts today?

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  • 2 weeks later...

Let me clarify the issue. The prior plan document, before the plan froze, had both nonelective allocated pro rata and matching contributions. Forfeitures were used to reduce future employer contributions. After the plan froze there have been no further contributions, hence the forfeitures have not been used. Yes the plan should have been amended when it froze to reallocate. So now, the forfeitures sit in a suspense account. What is best way to clean up - amend the plan to provide a nonelective contribution for 2010 and then reallocate the forfeitures?

Thanks for any suggestions!

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If the plan said forfeitures can be used to reduce (unspecified) future contributions, then yes, I think you could do a non-elective allocation now (or even for 2009?). If it was more rigid then you might have to consider opening a prior year(s) and fixing it. When you say the plan was "frozen," do you mean action was taken to not allow any future contributions, including deferrals, or did they simply stop making contributions?

Ed Snyder

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Usually the document will specify in which year the forfeitures must be used. Frequently that is the year of the forfeiture or the year following the forfeiture. That will determine for what year it must be allocated.

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Thanks! The base plan states that forfeitures will be applied as of the last day of the Plan Year in which they arose, or if necessary, the last day of the following Plan Year. So I guess we can do either. If I do the latter it will be for the 2009 Plan Year, and that is still timely for 415 purposes since it is only May. Since the plan is frozen it means NO contributions of any source are being made (client has a 403b plan now and the two plans cannot be merged). It appears I need to unfreeze the plan for one year - not sure I can retroactively do this. Since the authority on how to use the forfeitures is stated in the base plan I think rather than restate the adoption agreement I can just reallocate these forfeitures as nonelective via a board resolution?

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As to the issue of the plan being frozen and able or unable to reallocate forfeitures - I think it is ok to do so, with no special action or language being needed. It seems unlikely that the action to freeze the plan said "no more contributions and oh, by the way, no more forfeiture allocations." The ultimate answer would probably hinge on whatever language was used to "freeze" the plan or otherwise cease contributions.

It's not clear but these are 2008 forfeitures, yes? Just because we seem to like to look for trouble in this business, I have to wonder if the "freeze" as of 12/31/2007 didn't directly or indirectly lead to a partial termination that should have resulted in 100% vesting and no more forfeitures? That's not necessarily the case, but...that leads back to your initial post, where you say "I assume the amendment did not address forfeitures ..." - I don't really know how far you can go with this without having that amendment in hand.

Ed Snyder

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Hi Bird

The plan froze at the end of 2008 and all accounts were 100% vested. However, there were forfeitures, I assume from employees who terminated in 2008 with unvested amounts. The way the plan was restated is that all sections collapsed and the plan has a box Frozen checked, distribution options are available, 100% vesting, and that is about it. So the base plan says forfeitures should be applied in the Plan Year they arose (2008) or the plan year following (2009). The plan should have stipulated that forfeitures would be reallocated and how. Since no further contributions were made to the plan, the forfeitures could not be used to reduce anything, and there have been no expenses. How can I apply them as 2009 contributions? Can they be applied this year, 2010, the year the error is discovered? What happens in the case of an active plan with discretionary contributions where one plan year the employer does not make any contributions - is he forced to make a contribution so that forfeitures can be applied, or can forfeitures carry over year to year until there is a contribution?

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I found my answer in ERISA OUTLINE -

Chapter 3 - Accruing Benefits, Part 1, Section II, Part L Allocation of forfeitures from a participant's account

1.c.2) What if a plan with a discretionary contribution formula uses this approach for allocating forfeitures? Where the contribution formula is discretionary, but the plan provides for the allocation of forfeitures to reduce employer contributions, there is no required contribution to reduce. How then should such a plan provision be applied? A presumption is made that the employer has "reduced" the amount of its discretionary contribution by the amount of the forfeitures. The forfeitures are then allocated in addition to the "reduced" discretionary contribution made by the employer, except to the extent section 415 prevents a current allocation of the forfeitures (see Chapter 5). If the employer decides to make no contribution for the plan year, the forfeitures are still allocated for that year. Therefore, there is no practical difference in the way forfeitures are allocated under a plan with a discretionary contribution formula, regardless of whether the plan states that forfeitures reduce employer contributions (as described above) or are allocated as additional employer contributions (as described in 2. below). (But see the discussion in the text box regarding a contrary view taken by some practitioners.)

Contrary view believes that employer has greater flexibility. Some practitioners take the view that when the reduction method is used in a discretionary contribution plan, the employer has control over how to “dole out” the forfeitures. For example, under the facts described in the example in 1.c.3) below, the employer would decide how much of its contribution is being “reduced” for the plan year and use only that portion of the $11,000 of forfeitures. Under this view, the employer could decide that its intended contribution for the year is $0, and choose not to allocate any of the forfeitures, resulting in a deferral of the allocation of the forfeitures to next plan year. Our belief is that such discretion would violate the general requirement to have a definite allocation formula in a profit sharing plan, as prescribed by Treas. Reg. §1.401-1(b)(1)(ii), and would violate the annual allocation rules prescribed by Rev. Rul. 80-155, unless other statutory limits (e.g., IRC §415) prevented the full allocation of the forfeitures.

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I agree that forfeitures can "reduce" a contribution such that the net employer deposit is $0, so 2009 is ok.

Your first post said it was frozen 12/31/07; that was/is contradictory to your later posts.

Ed Snyder

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  • 3 weeks later...

The IRS just published an article on the timing and use of forfeitures in the new issue of Retirement News for Employers (Spring 2010). This supports what I have been saying all along....a plan cannot accumulate forfeitures in a suspense account for very long, the forfeitures must be used for the year generated or, if making frequent employer contributions, as soon as possible after the forfeitures have been determined. Does anyone disagree with the IRS' position?

IRS forfeiture account

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From the article:

Forfeitures must be used or allocated in the plan year incurred. The Code does not authorize forfeiture suspense accounts to hold unallocated monies beyond the plan year in which they arise. Revenue Ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participants’ accounts in accordance with a definite formula defined in the plan. This would preclude a plan from carrying over plan forfeitures to subsequent plan years, as doing so would defy the rule requiring all monies in a defined contribution plan to be allocated annually to plan participants. Revenue Ruling 84-156 states that forfeitures may be used to pay for a plan’s administrative expenses and/or to reduce employer contributions. Treasury Regulations §1.401-7(a) notes that forfeitures must be used as soon as possible to reduce employer contributions.

I think the author should have checked with the group that issues the opinion letters for prototype and VS documents before publishing the article. Our prototype and VS documents allow the option of having forfeitures either be used in the year they occur or used in the plan year following the plan year in which they occur. The plan document indicates which option was selected. At least part of the IRS doesn't agree with the author's position that forfeitures must be used in the plan year they occur.

But, I agree that the plan document must specify when and how the forfeitures will be used.

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Very good point, Kevin C. If you look further down in the article, I think the IRS makes a recovery from the statement you quoted. Under "Avoid the Mistake" the third bullet point says - For those plans that use forfeitures to reduce plan expenses or employer contributions, there should be plan language and administrative procedures to ensure that current year forfeitures will be used up promptly in the year in which they occurred or in appropriate situations no later than the immediately succeeding plan year.

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Guest Sieve

I think it is very interesting that the reg cited by the Service in support of the statement that the forfeiture should occur as soon as possible is a reg that specifically relates to a pension plan (i.e., a MPPP) & not a PSP!

Likewise, Rev. Rul. 84-156--also cited by the Service--deals only with the use of forfeitures by a pension plan.

On what basis are those conclusions automatically applicable to a non-pension plan?

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