Forfeitures used to offset Participant Contributions?

[Guest Vonnie RB]

The employer has decided to amend the plan to eliminate the match. What are the options for the forfeiture account? More specifically, can the plan use the forfeiture account to offset the employee contibutions? Is that the same as the money reverting back to the company? Is that legal?

[R. Butler]

Forfeitures cannot offset employee deferrals.

[QDROphile]

R. Butler, please explain why not.

[MWeddell]

I believe it would violate the DOL plan asset regulation. When one withholds employee deferrals, they must be timely deposited into the plan. The fact that the IRS views deferrals as officially employer contributions won't impact the DOL's position.

I'd be glad to read someelse's explanation too!

[R. Butler]

The biggest reason is exactly what MWeddel suggests. We have verified this with several attorneys. Also, wouldn't there be at least a possibility that the doument doesn't allow it? Although the the IRS may consider deferrals an employer contribution, every document I have seen clearly distinguishs employee deferrals from other employer contributions.

[QDROphile]

Money is fungible. I defer $100 from my pay. On pay day, my 401(k) account is credited with $100. Does it matter if the source is the emplyer's payroll disbursement account or the plan's forfeiture account as the plan asset rules go?

If you think it does, why is it different if my money purchase plan says I get an allocation of $100 and the source is the forfeiture account rather than the employer's bank account?

The employer has an obligation to fund in both cases, so can the difference be employer use of plan assets? The timing rule for credit of deferrals is honored in the 401(k) plan. The employer's bank account is the same in both cases (the employer is "using" plan assets the same way in both cases). My account is the same in both cases. Could it be that forfeitures cannot be credited against against contributions of a different character? Then matching forfeitures could only be used for matching contributions, profit sharing forfeitures for profit sharing contributions, etc.

If we don't have symmetry in similar circumstances, one looks for authority to explain why, however arbitrary that authority may be. I was hoping someone had a reference immediately at hand; there may well be such authority.

There are obvious practical reasons for not crediting against deferrals. Such strict management of the forfeitures is an administrative burden.

[R. Butler]

I understand QDROphile's point. He is correct that there is no statute that specifically states that forfeitures cannot be applied against employee deferrals. We have researched this issue for a client and based partly on the advice of several attorneys, we advised the client that it could not be done. At a minimum this is a safer approach.

[Appleby]

Using forfeitures to offset employee deferrals is tantamount to a reversion, as employee deferrals are taken from the employee’s “paycheck’ so to speak and is not considered an employer contribution (technically- see R. Butler’s explanation)

As this is a profit sharing plan, the forfeitures should be allocated to the individual participants who are entitled to share in employer contributions- including those who did not defer. I.e. the forfeiture should be a contribution in addition to any deferral contribution made by the employee

[QDROphile]

I accept R. Butler's "why ask for trouble" conclusion. It is not worth it to get into a touchy area. Sometimes we don't do things even if we can, especially with retirement savings.