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In case anyone was still curious, I finally received a response from the record keeper: "Although there is no direct guidance on this issue, the statutory rules and other guidance applicable to plan administration require plan administrators to proceed in the best interest of the plan and participants. By consistently moving small balances to the plan forfeiture account, the plan saves administrative costs, retains dollars in the plan, and reduces transaction costs, thus furthering the objectives set out in ERISA and other regulations". This particular record keeper bills the plan sponsor a per participant fee - the fees are not deducted from plan assets. The forfeitures are also being used by the employer to offset matching contributions. I subsequently pointed this out and that the practice of forfeiting small balances is acting in the best interest of the employer, not the plan or participants. I doubt I will get another response. I am going to pass along to my client the advice from Lou S:

I have heard that before but I don't think so. If we take that logic one more step what is the value of the stock the second after the transaction closes? Isn't it the amount of cash divided by the number of shares? I capital transaction that sells shares isn't supposed to increase or decrease the value of the shares if it happens at FMV. It does lower EPS in active companies but if the new shares are bought at FMV the increase of cash on the balance sheet is supposed to offset the decrease caused by the effect of EPS going down. I would add a company with no assets or operation can have value. If the idea for the business and expected management are set up you can make a legit claim there is an expectation of future earnings the stockholders will benefit from. In the end appraisers will tell you the value of a stock is the net assets plus the present value of the future earnings. The big unknown is what is the future earnings to do the present value calc on. That is why ESOP stock appraisals always look at management projections. They use other methods to benchmark and make sure that method is grounded in markets if possible but the big driver of any ESOP appraisal is the projections of the businesses earnings.

My take on this is that it probably is a PPT. The reason being, that while 6 our of 85 is below the IRS' *rule of thumb* of 20%, it is, in fact, 100% of the employees for the *company sold.* I've seen the IRS apply the total number of employees in the company/division/office sold/transferred/shut down as the denominator for purposes of determining whether the PPT occurred (which, unless some of those ee's are transferred elsewhere within the original employing organization) often exceeds the rule of thumb 20%. And I agree - it's probably the right thing to do anyway. I wouldn't recommend continuing to vest these people based on service with the buyer - requires an ongoing close relationship that most companies don't want to get involved with.