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Perhaps governmental plans lack the requirement to allow for five (5) consecutive periods of severance/year breaks in service to forfeit amounts where an extinguishing distribution of the accrued benefit or account balance has not occurred. Please provide helpful citations for this inquiry.

Hi. Client is terminating a 401k Plan. There is a sizable amount in the forfeiture account. Even after paying expenses, there will be a balance left over. The document says that forfeitures are allocated first to restore previously forfeited amounts to participant accounts. Thereafter, remaining forfeitures are used to: offset Plan expenses reduce future matching contributions reduce future nonelective contributions Since we are terminating, and thus there will not be any future contributions, how should we allocate the remaining forfeiture balance? Pro-rata to participants according to?? Thanks.

A 401(k) plan has many participants making very small contributions - $4-$5 a week in some cases. The plan sponsor records participant termination dates with the recordkeeper after each pay period. The recordkeeper has taken it upon themselves to forfeit small balances for former employees after the plan sponsor enters their termination date. They are forfeiting employee pre-tax and Roth salary deferrals without any direction from the plan trustees and with no apparent reason other than it's their "policy" not to cut a check for less than $25. In one instance they forfeited $80 of an employee's pre-tax salary deferrals - about $20 at a time because the plan sponsor made 3 $20 deposits after the employee's termination date was entered. All of the others we have found were $10 or under. Has anyone out here come across this practice and is there anything I'm missing that would allow it? The plan document certainly doesn't say a small balance can be forfeited vesting be damned. I'd feel better about it if some of the experts on BenefitsLink have experience with similar approaches by recordkeepers and/or have had the IRS or DOL approve the practice.

Does anyone know whether Governor Andrew Cuomo is at risk of forfeiting his New York State pension?

Hi all, When should a previously forfeited ESOP balance be restored to an employee’s account? Should the forfeited balance be restored upon return? After a year of service? Retroactively to the day of return after a year of service? I’ve confirmed with the Admin that it’s eligible for restoration. I left at 0% vested and my entire balance was forfeited. I returned a year and a half later, and have put in a full year of service since. There is nothing specific that I can find in the document. It states, “Forfeitures: Some participants will terminate employment before they are fully vested in all of their Accounts. The portion of those Accounts that is not vested is called a “forfeiture.” Forfeited benefits will be used to pay Plan expenses or added to the Company’s contributions and allocated to eligible participants’ Accounts. If you are rehired by an Employer after your non-vested Account has been forfeited but before you have five consecutive one-year breaks in service, you are eligible to have the amount of the forfeiture restored to your Account. If you received a distribution of the vested portion of your Account, you must pay back to the Plan the amount of your distribution to have the forfeiture restored. Whether you repay the distribution or not, your prior vesting service will be counted for vesting your Account.” The timing of the restoration makes a rather huge difference in this case, since the appreciation of the balance through 2020 is significant. I returned in February 2020 but my shares were only restored in March 2021. My thinking is since I didn’t receive a distribution at termination, I would have been fully “repayed” upon rehire and immediately eligible for restoration. If not specified in the document, is there a standard to follow? Is there somewhere else in the document I should check?

Our ESOP administrator reinstates shares for those rehired participants that terminated employment with a 0% vested balance. There is no time limitation for reinstatement. It was my understanding that if a participant terminated employment 0% vested the terminatino date was considered a distribution and the 5 year Break in service rule calculation would start. Is there a limitation on reinstatement for 0% vested rehires? The plan doc does provide language for partially vested balances reinstated within the 5 year break in service for those that return the vested shares.

Hi there - our plan recently had the forfeitures reallocated automatically due to "pass through processing" and they were distributed to plan participants (myself excluded). We had intended to use these for plan expenses and told the recordkeeper this back in March, however, they did not do so. We've asked the recordkeeper to reverse the transaction, but they will not and are requesting a hold harmless letter and want us to take on the risk. They mentioned there could be a fine or penalty for removing funds from the participant's account, although they incorrectly allocated to them in the first place. My questions are: 1) What the fine would be if this reversal came up in an audit? 2) What the risk is that this reversal would cause an audit for a small plan filer? 3) Would an auditor be understanding since the recordkeeper has even confirmed via email that we had requested the fees be applied to plan expenses back in March?

I am trying to get a definite answer on this question, any prior discussion seems to skate around the issue. Can a Plan Administrator use forfeiture assets to fund the lost opportunity cost portion of a missed discretionary contribution (i.e - Profit Sharing)? I am certain that forfeiture assets cannot be used to fund the lost opportunity cost portion of "required contributions" (either employee or employer) because this is in direct violation of a fiduciary's "Prudence Standard" as well as a Prohibited Transaction, accordingly, when these types of contributions are delinquent the plan has a claim against the employer. However, Field Assistance Bulletin (FAB) 2008-01, specifically states that "employer contributions become an asset of the plan only when the contribution has been made". Under this definition because the contribution is not late it cannot be a PT; but does the fiduciary still have a duty to collect creating a claim against the employer for the lost opportunity portion. I am inclined to say that forfeitures cannot be used to fund the lost opportunity cost portion of a missed discretionary contribution. I don't see any language that qualifies the lost opportunity cost as an expense eligible to be pulled from the forfeiture account, and transferring the lost opportunity cost from the forfeiture to the participant does not make the plan whole.

I don't usually worry about $5 or $10 in earnings in forfeiture accounts, but recently I am seeing large plans with $3500 and $5000+ in annual earnings. The employer is using forfeitures and their earnings to offset discretionary contributions. It feels wrong - the earnings part, I mean. Wouldn't this be a prohibited transaction? I feel more confident that it would be a PT if it were Safe Harbor/QNEC/QMAC contributions they were using earnings to offset. Your thoughts and guidance will be appreciated!

I had a forfeited unvested balance showing on my 401k statements, which resulted in my ex and I calculating different figures for our QDRO. The unvested balance was forfeited by a 5 year service break before filing the divorce petition. The company kept the forfeited balance in my account for a few months before transferring it back to their account. My position is that the forfeited unvested balance had no value to the marital estate prior to filing for divorce and should not be included in QDRO calculations. What is your opinion?

Hello, While the issue does not come up exactly in the context of an ESOP, the administration of the Plan/Fund is similar enough to ask the question here. Can a Plan Administrator reallocate the unvested shares of an employee who has currently left the employ of the company to other participants before a "forfeiture" event (i.e. 5-year break in service or distribution)? The idea is to keep the account "open" and accounted for, but have the shares reallocated. In the event the employee comes back before a forfeiture event, the shares would be reissued/contributed/reallocated to the returning employee. The Volume Submitter Plan this fund is based off of states that the Plan Administrator will continue to hold the undistributed, non-vested portion of the account of a participant until a forfeiture event, so I believe that as the plan is written, the stock would need to remain in the account and not be reallocated. However, can the plan be amended to state that only the account will remain "on file" but allow for the stock to be redistributed? On a similar note, can a plan be amended to shorten or do away with the 5-year break in service requirement (other than by allowing a distribution)? I am pretty certain that one cannot because the ERISA Outline Book (2016) makes no mention of it; because seems IRC Sec. 411 requires a 5 year period; and because of the issues of cost basis and the deduction of additional contributions (to make up for growth-or is growth even accounted for during the break in service period?), but my assigning attorney is pretty certain that the Plan can be amended to shorten the time before forfeiture. Full Disclosure: I am a summer associate, but I intend to work in the Benefits practice and have found this forum helpful. I would appreciate some guidance as to additional resources I can look at. Thanks!

This is a new one on me. A state instrumentality ("Employer") sponsors Plan A, its own defined benefit plan (i.e., Plan A is not a state-wide, public plan). Participant X, who has a vested benefit under Plan A, has been arrested for embezzling a large amount of money from Employer. Employer would like to amend the plan prospectively to provide that any participant convicted of a felony against Employer forfeits all employer-provided benefits under the plan. Can it do so? The plan is exempt from ERISA as a governmental plan, so the federal vesting and anti-alienation rules don't apply. Not surprisingly, the state's statutes don't deal directly with this question. (And the statutes governing the state's own pension plan don't apply.) Does this boil down to simple state contract law? Cheers.

I have a balance forward plan with pooled accounts at LPL Financial. Each participant receives their own statement. When forfeitures occur, instead of having a separate forfeiture account, they put the money into the owner's account. I have tried convincing them they need a separate forfeiture account to no avail. They don't want to pay for an account that isn't active. Isn't this a problem for the plan? Forfeitures are supposed to be allocated yearly. Is there regulation I can quote to convince them to have a separate forfeiture account? Thanks in advance.