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Either have the client declare a PS contribution (or match if the plan allows for discretionary match) equal to the amount of forfeitures and off set the contribution by the reallocated forfeitures while following the terms of the document?

Reasonable assumptions about things like salary increases are fine, but I don't think you can make assumptions about plan provisions that will be adopted or amended in the future. 1.430(d)-1(d) lays out rules for what plan provisions may be taken into account when determining the funding target and target normal cost. With limited exceptions, only plan provisions actually adopted by the valuation date may be taken into account, unless the sponsor makes a 412(d)(2) election.

1.416-1, M-7.

There's no requirement that ESOP loans be repaid ratably, but the tax regulations include this statement, which is probably the basis for the threat of disqualification: Caution against plan disqualification. Under an exempt loan, the number of securities released from encumbrance may vary from year to year. The release of securities depends upon certain employer contributions and earnings under the ESOP. Under § 54.4975-11(d)(2) actual allocations to participants’ accounts are based upon assets withdrawn from the suspense account. . . . At the same time, release from encumbrance in annual varying numbers may reflect a failure on the part of the employer to make substantial and recurring contributions to the ESOP which will lead to loss of qualification under section 401(a) The Internal Revenue Service will observe closely the operation of ESOP’s that release encumbered securities in varying annual amounts, particularly those that provide for the deferral of loan payments or for balloon payments. [Treas. Reg. §54.4975-7(b)(8)(iii)] "Substantial and recurring contributions" is a very low bar, but no contributions at all probably falls beneath it.

following up on Tom's comment - thus, this is really a CPA's job to do the "reasonable" allocation. The TPA/actuary should figure out the deductible amount for the whole plan and stop there...despite of temptation to keep going...

My "7-10 Split Plan" is just to roll it hard and hope for a bounce across the lane.

I agree with directing the client to approach qualified ERISA counsel to prepare the VCP filing. I'm thinking the VCP filing might focus on putting the participants/former participants in the place they would have been if B's 401(k) had merged into A's 401(k). Most difficulty likely to be with 3 participants who took distributions based on the impermissible termination of B's 401(k). Just some off the cuff thinking here. Hope you find good help.

I "approach" this by directing the client to approach qualified ERISA counsel to prepare the VCP filing. I'm not an attorney and I'm not touching a filing that might later require a response from legal counsel.

A forfeiture allocation is an annual addition. So you can't allocate it to participants whose annual additions limit is zero (because their comp is zero) in the current year. In what year did the forfeitures arise?

This is a typical ethical conundrum. What to do; what to do? Each of us has to answer to our own ethics and our own guiding rules and hopefully they will not conflict. What would I do? Let me think.... 1) Resign. Immediately, with a letter and an explanation that I believe they have both disqualified their plan (the 415 issue) which means their rollover IRA is "no good" and subject to the 6% cumulative compounded excise tax which will eventually take 100% of the rollover as an excise tax when the IRS challenges it, and I would also explain that they have actually stolen money from other participants and besides possible criminal penalties, IRS penalties and DOL penalties, their bonding company is also going to go after them since the bonding company will have to make the other participants whole to the extent of the theft. 2) No way we are going to prepare a 5500 at all; see 1 above. We no longer work for this crook. 3) Now the hard one: what do I do about reporting this to someone? I'm pretty sure I don't have a legal obligation under the society ethics rules. Now, what about my moral responsibility? If a participant calls, I'm going to tell them to contact the DOL since I no longer work for the client. Since I have never actually had to deal with this kind of an issue, I'm not sure what I would do. My heart tells me that the crook deserves to be taken to task, which would mean the DOL has to be notified. Is there a John Doe notification to DOL like IRS has John Doe ruling requests? I'm sure a private phone call to the local DOL office will get action. Would I do that? Hmmmmmmm.......

#1 resigning with a letter why is certainly one option. #2 completing the Form 5500 accurately and to the best of your knowledge would seem to be a requirement, regardless of whether or not you suspect it will trigger an audit, which it likely will. Since I think you would have to report party-in-interest transactions, failure to pay benefits when due, a reversion of assets to the employer, and possibly other transgressions. #3 I don't know what the legal rules are regarding this, though Peter G seems to have it covered better that I could. Though I don't think there is a prohibition on directing participants to the DOL should they call your office.

Dalai Pookah, the description “ERISA Attorney” beneath your screen name suggests you might be a lawyer. If so, you might consider relevant States’ lawyers’ Rules of Professional Conduct. I say States’, plural, because a few States’ rules might apply. For example, a State’s law might apply because it is a State that admitted you to law practice, because your conduct occurred in the State, because your conduct affected a person who or that resides in the State, or because your conduct affected property in the State. If you are a lawyer but about the situation you described did no work as a lawyer, you might read each State’s rules carefully to discern which rules (within the State’s set of rules) apply. Some rules refer to “representing” (including advising) a client. Other rules lack such a reference and might apply because one is (or was) a lawyer, even if she never represents, advises, or otherwise serves any client as a lawyer. If your client did not use your services to further your client’s crime or fraud, States’ rules differ about whether one must, may, or must not reveal confidential information, which often includes information you learned through your role, even if the information is not a secret. If a rule applies to your conduct and you’re considering how it applies to the facts of your situation, you would think carefully about which person is (or was) your client. Is it the pension plan?, the plan’s administrator?, the plan’s sponsor?, the owner of the plan’s sponsor? Different answers to those who’s-the-client questions can lead to different analyses of the lawyers’ professional-conduct rules. If you follow the American Retirement Association’s Code of Professional Conduct, it allows a member to obey law (including, for example, a licensee’s conduct rules) that applies to the member. Feel free to call me if you’d like more thinking than is appropriate for a public website’s display. -------------------- BenefitsLink mavens: For a university’s LL.M program, I teach a course, Professional Conduct in Tax Practice, for “the three As”—attorneys, accountants, and actuaries. For ASPPA members, I lead CE/CPE/CLE ethics sessions. I’d welcome your thoughts to help my teaching. If an ASPPA or ARA member governed only by that Code of Professional Conduct is an owner or employee of a TPA firm, sees facts like those described above, did nothing to facilitate the crime or fraud, and lacks responsibility as a retirement plan’s fiduciary: May the member, without the principal’s permission, reveal the information? Or must the member treat the information as confidential information, and so not reveal it until “required to do so by law”? And for either (or another) answer, why?