Definition of Zero % Vested (Forfeiture Timing Issue)

[Guest RS Vatalaro]

If a newly terminated participant has $8,000 in deferral money (obviously 100% vested) and $2,000 of 0% vested profit sharing money, is the participant considered 0% vested for forf purposes? And thus the forfeiture can occur prior to the participant taking a distribution (assuming 5 1-yr breaks have not passed)? Or do I have to wait until 5 years have passed (assuming the participant does not request a distribution) in order to forfeit the non-vested PS?

Corbel supplementary material to their prototype states "for purposes of these rules, a zero percent vested participant is treated as having received a distribution of the participant's vested account balance (ie zero) in the year of termination, causing the forfeiture to occur at that time." Language is silent as to whether we are just talking employer money, or all money sources.

Client wishes to use the terminated participant's unvested PS money now to offset the employer's liability for currently due PS contribution (this is an allowable use of forf's in accordance w/ their doc). Can we do this?

Thanks for any help.

[R. Butler]

ERISA Outline book says you can disregard deferrals and forfeit 0% vested employer money. However, be sure to check your plan document.

[jpod]

Seems to me that the ERISA outline book is wrong. Is there any authority for ignoring elective deferrals for purposes of the "deemed cash-out" rule?

[R. Butler]

Sal, wrong? Never. He cites §1.401(k)-1©(1)(ii). It provides that employee deferrals are disregarded for purposes of applying §411(a). The cash-out rules are provided under §411(a).

I too doubted Sal in my youth, but we checked it pretty thoroughly and could not find a whole in the position set forth. Be careful and make sure the document agrees though.

[jpod]

That is not what the cited regulatory provision means, and now that you mention it I'd be surprised if the book really says that's what the provision means. The purpose of that provision is to make it clear that you cannot take a participant's elective deferral account balance into account in applying a vesting schedule to matching or other contributions; otherwise, you will not have a qualified CODA. Look at the example in the regs.

Following R. Butler's interpretation, you could ignore a participant's elective deferrals for purposes of applying the $5,000 mandatory cash-out limit to the participant's other accounts. However, don't we all agree that the $5,000 limit does not work that way?

So, getting back to the original question: what is the authority for ignoring elective deferrals in applying the deemed cash-out rule? My position is that if a participant decides to leave his elective deferral account in the plan, you cannot forfeit the non-vested portion of his other account(s) until he has a 5-year BIS.

[actuarysmith]

I think that jpod is right - if the participant chooses to leave his balance in the plan (i.e. not take an immediate distribution) then the employer cannot treat them as forfeiting until 5 yrs BIS, or distribution occurs.

Any other thoughts?

[Guest dmj1998]

I agree with R.Butler (especially with checking your plan doc). The original post did not mentioned that anything was going to be done with the participant's deferrals and, with a balance of $8K, I see it as a non-issue. If the plan doc has wording for forf. and restoral procedures, I think the plan sponsor has the right for forf. the $$ and use them for any other allowable purpose.