403b - Forfs Revert to Employer

[austin3515]

I have a 403b document ("widely" used by a lot of 403b's) that states in black and white - "Forfeitures shall revert to the Employer."

Thoughts? When I saw this, the first thing that occurred to me is that the following is in 401(a)(2) (OK, I had to look for the exact reference!) which would not apply to a 403b plan--hence, it WOULD be possible.

(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries

Just curious to know if anyone has seen this.

[mbozek]

IRC 401(a)(2) does not apply to 403bs because the assets of the 403b are not held in a trust so there is no prohibition on forfeitures reverting to employer before termination. Forfeitures can be held in a side fund and used as contributions to other employees' accounts.

If forfeitures revert to a profit making employer forfeiture will be subject to up to 50% tax on reversions plus regular income tax which is why forfeitures are rarely done.

[Kevin C]

Interesting. For an ERISA covered 403(b), would ERISA 403©(1) apply?

Act Sec. 403. ©(1)

Assets of plan not to inure to benefit of employer; allowable purposes of holding plan assets.—Except as provided in paragraph (2), (3) or (4) or subsection (d), or under section 4042 and 4044 (relating to termination of insured plans), or under section 420 of the Internal Revenue Code of 1986 (as in effect on the date of the enactment of the MAP-21), the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.

[austin3515]

That is interesting... But alas, I have a document that says to do just that, in black and white.

[Kevin C]

Is it an ERISA covered plan?

[austin3515]

Yes it is, and the Plan Document includes provisions for Er Contriubtions, so the author clearly new it was subject to ERISA.

[Kevin C]

Is there a provision like you would find in a 401(k) saying that you are required to follow the terms of the document to the extent they do not violate ERISA? If it does and if the ERISA cite above applies, you should be able to ignore that provision. Either way, it would be worth a phone call to the document company to ask about it.

[austin3515]

I'm going on the assumption that the document author made an interpretation that this was allowable. I would not write my document this way, but "they" did, and although "they" are not my favorite provider (putting it politely) they are a big player in the 403b market. So I'm comfortable deferring to their judgment on this one.

But you do have me convinced with your cite that I will never write a document that way.

[mbozek]

When ERISA was enacted in 1974 all contributions eligible for tax deferral under 403b had to be 100% vested. It was assumed that only vested contributions could be counted for determining the 415 limits. However, in the 90's the IRS published some guide line, ruling etc which concluded that for 415 purposes non vested 403b contributions would be included as employer contributions in the year the contributions were made instead of in a later year when they were vested which permitted employees to receive the max amount under the 415 limits in each year they participated in the plan.

So providers began including language that allowed for deferred vesting of 403b contributions up to the 415 limits. To comply with the non reversion provision of ERISA 403c the plans contain a provision that forfeited amounts are transferred to side fund or suspense account in the contract that is used to fund contributions in the following plan year.

[TPApril]

So a 403(b) plan that is going to terminate can revert the forfeiture account back to the employer? Employer is a non profit and does not pay taxes, so no 50% reversion tax?