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Forfeiture account


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Hi, 

One of the 401k plans that is terminating, the plan sponsor has a huge balance in the forfeiture account.  The plan document does not states if the balance in the forfeiture can be re-allocated to the eligible participants.  I believe they can have the funds re-allocated however will this require a plan amendment since the plan document does not states anything about this.  I thought IRS permits re-allocation for terminating plans isn't?

Thanks 

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Forfeitures should be disposed of annually. I'd be shocked if the plan doesn't have some direct or indirect mechinism to allocate to participants as a profit sharing allocation. Like simply have the company declare a profit sharing contribution equal to the forfeiture balance and then reduce employer contributions by the forfeitures.

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Yes, they will be paying off the fees and also be doing a match.  Post which the plan will still have balance and since plan document does not state if residual balance in the forfeiture can be re-allocated can the PS still have it re-allocated? or will this require a Plan amendment. 

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Once again if the PS provisions say the forfeitures can reduce the PS contribution all you do is have the client declare a PS cont equal to the forfeitures.   The forfeitures will completely reduce the PS cont so the client doesn't put money into the plan.   The forfeitures get allocated as the PS cont.  

 

So does the plan document say forfeitures reduce the PS cont?  

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If you have been the TPA for this plan for a while, you may want to ask yourself ('you' meaning your firm), why haven't the plan's forfeitures been timely allocated in the past?  They are supposed to be used every year.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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12 minutes ago, BG5150 said:

If you have been the TPA for this plan for a while, you may want to ask yourself ('you' meaning your firm), why haven't the plan's forfeitures been timely allocated in the past?  They are supposed to be used every year.

This is an excellent question by the way.   Obviously it is too late to do anything about it with this plan but the firm might want to look at procedures and controls if this was missed.  

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They have been using the funds to pay invoice, so there is no misses.  Since there is a balance of $78000 in the forfeiture and the plan document only states they can use it to reduce PS Cont and fee which they will do, post which the forfeiture will still have balance and I'm wondering if they can have it re-allocated as well if so will an amendment be required? 

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If a plan has a balance in the forfeiture account after the fees are paid, the remainder should either supplement an employer contribution or be reallocated as an Employer contribution.  The Employer may not be making a Profit Sharing this year, but they could always "declare" one in the amount of the forfeitures to be used.  Even if to pay expenses is the only thing checked int he adoption agreement, the remainder should still be reallocated. 

This is from the Datair Basic Plan Doc we use:

[quote]Unless otherwise elected in the Adoption Agreement, the Plan Administrator shall allocate such Forfeiture in
the same manner as a contribution by the Employer for the year in which said Forfeiture occurred. For each
Plan Year that Forfeitures are allocated, the Plan Administrator shall designate the specific Employer
Contribution or Contributions that the Forfeitures reduce or supplement. The Employer may elect in the
Adoption Agreement to use Forfeitures to offset administrative expenses of the Plan to the extent the
expenses are Plan expenses and not settlor expenses and any remaining Forfeitures shall be allocated in
the same manner as a contribution by the Employer for the year in which said Forfeiture occurred
.
Forfeitures that are used to supplement a contribution will increase that contribution that was otherwise
specified for the Plan Year. Forfeitures that are used to reduce a fixed required contribution reduce the
amount that the Employer would otherwise have to contribute to the Plan for the Plan Year.[/quote]

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Be careful about recent forfeitures.  If the people whose account is being forfeited terminated employment within 5 years of the termination date, the IRS can take the position that they should be vested.  Certainly if they terminated within 12 months of the termination, there is a vesting issue.  If they haven't missed a forfeiture use date, so that the forfeitures are recent, then it makes me think that there's a problem here ...

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IMHO, this is an operational error (failure to follow the plan document) and the sponsor should investigate correction through EPCRS or risks plan disqualification.   Sounds like it may not be eligible for self-correction because of how long this error occurred.  It would be corrected by reallocating all forfeitures in the plan’s forfeiture suspense account to any participants who should have received them had the forfeitures been allocated on a timely basis.  In VCP, the plan sponsor could also ask for correction through a PS allocation to current employees.

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