Cash Balance Forfeiture Account

[Stash026]

I know there are different rules, since it's similar to a Defined Benefit Plan, but can Plan expenses be paid out of a Cash Balance's Forfeiture Account (similar to a 401(k))?  For instance, TPA Fees?

Thanks!

[Effen]

Sorry, no such thing as a "cash balance forfeiture account".  The plan is either over funded, or underfunded.  All accounts are hypothetical.  No money is actually allocated to anyone's "account".  

But yes, the plan can pay expenses for required services.  This generally includes actuarial fees to prepare the valuation and 5500, benefit calcs, audit fees.  The following is a link to the DOL site discussing what fees can be paid from the trust.  https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/guidance-on-settlor-v-plan-expenses 

[jpod]

I am not sure about how you describe it (forfeiture account in a db plan?), but certainly plan expenses can be paid with plan assets if the plan document says so. 

[Stash026]

This was a plan we just took over.  It had a 6-year graded vesting schedule and therefore a forfeiture account in it.  I'm still reviewing the setup, etc of course.

That said they asked if they could use that money to pay yearly plan expenses (i.e. filing 5500, compliance work, etc), which is what I want to confirm (or if it can just come out of the assets in general)

[Effen]

Again, no such thing as "forfeiture account" in a cash balance plan, regardless of the vesting schedule, which BTW, must be at least 100% by year 3.

You need to get them away from the concept that it is real money allocated to real accounts.  

If they have money allocated to a "forfeiture account", do you include it in the assets when you determine the MRC and AFTAP?  

Let me say this a different way:  They are permitted to pay certain expenses from the fund regardless of whether they are over-funded or underfunded.  The existence of an erroneous "forfeiture account" is not relevant in that decision.

[Mike Preston]

I have seen this before in the wild.  Very sad unless the client is kept in the loop and keenly aware of what is going on.  Alas, over time they are seduced into thinking the plan is more akin to a DC plan than a DB plan.  What I have seen is that the Trustee decides to create investment pools that mimic participant entitlement. Things are theoretical until a participant terminates employment at which point the plan is amended to magically make the entitlement match the assets.  There is no way to ensure that this will always "work" but there are seemingly many clients who really like this design.  When things don't "work" as advertised they usually leave the nest and brave the real world. It is then left to those of us who practice without psuedo-accounts to untangle the mess.

[Effen]

Thanks Mike - can you provide any more details about this?  Are you saying this is kosher or just that people are doing it.  

[Mike Preston]

There is nothing that isn't Kosher.  At least as long as it is done properly!!!  I see a lot of people not doing it properly.  Which, of course, means that those aren't Kosher.  See the loop?

[david rigby]

Just guessing, it appears the original post is from someone working for a TPA.  Whether from a TPA or a plan sponsor, I suggest you contact a pension actuary for some advice (ie, what Effen and Mike and jpod said is spot-on).