Allocation of forfeitures in frozen MPP plan???

[chris]

MPPP was frozen in 1998. Forfeitures have occurred in 2001 plan year and TPA wants to know how to allocate them since contribution formula was amended at freeze to 0% of compensation. ??? Plan doc provides for forfeitures to reduce employer contributions. Possible to amend doc to provide for forfeitures to be used as additional contributions? Even if possible, how do you deal with the 0% of compensation issue? In both cases, reduce vs. additional still yields unallocated forfeitures....

[david rigby]

Implicit in your question is that the plan defines the allocation of forfeitures as related to the amount of contribution. If so, then the plan sponsor probably should amend the plan to insert a method for allocating forfeitures. If not, then perhaps the plan has some other direction for your question.

[chris]

The document does not speak to allocations when the plan is frozen, it only povides that forfetures are used to reduce the employer's contribution. The allocation formula is based on x% of compensation. As to amending to add a method of allocation, what are the general types of methods available?

[Mike Preston]

I would seriously question a plan design that has potential forfeitures (that is, anybody is less than 100% vested), a 0% formula and a provision that calls for forfeitures to reduce contributions. Nonetheless, in the absence of the IRS getting upset, the net result of these provisions is that forfeitures are not allocated...they are kept in suspense.

Did the plan get approval from the IRS on this plan design? I would expect the IRS to pick this up in a regular LOD application.

Assuming there is no desire to retroactively change the past (which I suppose the IRS would not object to if it turned out to be non-discriminatory through a filing under EPCRS, probably CAP), you merely change the document with respect to a year where you don't want this to happen. You can amend up to the 412©(8) deadline without a problem, I would think. So, you have until 2 and 1/2 months after the end of a year to modify the document and take that modification into account when doing the allocation.

[mbozek]

Under IRS reg. 1.401-7, forfeitures in a pension plan (e.g., a mp plan) must be used to reduce future employer contributions as soon as possible. They cannot be kept in suspense indefinitely. Under the reg. 1.401-7b example 2, the forfeitures can be allocated among remaining participants if plan is terminated. Solution (1) is to amend plan to provide for allocation of the forfeitures among the participants for 2002 by allocating as a % of each emplyees comp ( $10,000 in forfeitures and $200,000 in comp of remaining participants then each part. gets 5% contribution) or vest all participants retoactively in their account balances so there are no forfeitures to allocate. Then terminate the plan and distribute the assets. Solution 2 is to merge the MP plan into a PS plan and allocate forfeitures among the active participants.

[Kirk Maldonado]

Why not use the forfeitures to pay plan administrative expenses? If that wouldn't use up all of the forfeitures, then you could hire an attorney to advise you as to whether you could use the forfeitures in that manner. That should be able to enable you to expend whatever amount of forfeitures you have.

[mbozek]

Kirk: Why is that technically proficient people lose sight of the economic impact of their advice on plan participants under the exclusive benefit rule. Is it really a prudent use of plan forfeitures to pay admin expenses in a suspended mp plan instead of just terminating the plan and allocating the forfeitures among the active participants as an additional benefit? If teminating is expensive then convert the mp plan to a ps plan, allocate the forfeitures and keep the mp allocations separate. Just because forfeitures can be used to pay plan expenses doesnt mean that it is a prudent use of plan assets to pay expenses and hire an attorney.

[Kirk Maldonado]

MBozek:

Obviously, you didn't realize that my prior reply was an attempt at humor.

[Mike Preston]

mbozek, can you provide the cite where you got the "as soon as possible" language? I've seen many a plan carry forfeitures over more than 1 year due to formula restrictions. I've never heard the IRS argue that such a plan needed to be amended in order to prevent the forfeitures from remaining in suspense. While the IRS might object to a 0% formula; if they have a Letter of Determination on that formula, I am hard pressed to see where there is a requirement to increase the formula.

There may be valid reasons why the plan isn't being terminated. And the use of forfeitures to pay administrative expenses (if allowed by the plan document) is not, in my opinion, a violation of the exclusive benefit rule or imprudent in any way. And that includes hiring an attorney (or other plan advisor) to provide options when the Plan Administrator finds the document unclear. Seems to me that retention of a plan's qualified status is far from imprudent.

Admitedly, this is a question from a TPA, not from a Plan Administrator, but it doesn't change the rationale, it just means that the Plan Administrator needs to get advice somewhere other than from this TPA, because this TPA is unsure.

One other point. The reg cited is a bit on the ancient side. Wasn't there a change in law that allowed pension plans to specify that forfeitures are allocated in addition to the formula based contribtuion, rather than requiring the forfeitures to reduce future contributions? If so, the reg is not consistent with current law in that respect. And, if so, the amendment to the plan might be as simple as selecting that option. In fact, maybe that option was elected when the plan was frozen in 1998 and the answer to this whole thread is really: RTFD. (read the fantastic document).

[mbozek]

reg. 1.401-7(a) "amounts so forfeited must be used as soon as possible to reduce employer contributions under the plan" applies only to pension plans ( MP plans ) and not ps plans. My understanding of 0% plans is that the 0% contribution is established upon inception. Also a determination letter is issued only as to form, not operation of the plan under the regs, rulings and announcemets of the IRS. My point is that because mp plans are inherently obsolete after 2001 (as has been discussed in various threads) it is a questionable use of plan assets to continue to pay admin expenses (arent there also sked B costs?) to continue a mp plan instead of allocating the forfeitures for the benefit of the participants and terminating the plan or going to a lower maintence product such as a ps or sep. The fact that an administrative practice is technically permissible/legal does not mean that it is in the best interest of the plan participants. I wouldnt have problem if the er paid all of the admin expenses on a suspended plan that had no forfeitures.

Kirk- I understood your implicit message but my concern is that others who read it may take it literally as as acceptable conduct.

[Mike Preston]

I guess it depends on one's definition of "as soon as possible." I have never seen the IRS make the leap from that phrase to: "if you have forfeitures that would otherwise not be allocable because of a plan limit as to allocations, you must amend your plan so as to avoid being unable to allocate those forfeitures."

You continue to posit that plan sponsors have some duty to provide benefits in accordance with a standard that I'm not aware of. While I don't disagree with you that the Plan Sponsor might consider all the things you mention, in the absence of the Plan Sponsor coming to the conclusion that they want to avoid administrative expenses paid by the plan I don't see any reason to disuade them.

BTW, there are typically no schedule B costs associated with a money purchase plan, as that schedule is required only money purchase plans that have a deficiency and for defined benefit plans. Even when a money purchase plan has a deficiency it should be noted that the schedule B is filed without the need of an actuary's signature, so the additional adminsitrative costs are insignificant.

Notwithstanding the above, I'm more and more convinced that if the document wasn't changed to provide that forfeitures are allocated in addition to the required employer contribution (which was 0), the appropriate correction in this case is to retroactively consider all participants 100% vested at the time that the plan was amended to have a 0% formula. And if this requires EPCRS in some form or another, so be it. I seem to recall that there is a ruling dealing with partial terminations that requires full vesting if the plan in question is amended to increase the likelihood of a reversion. A money purchase plan that does not fully vest participants, does not provide that forfeitures will be used to increase allocations and provides for a zero percent formula would unquestionably provide for an increased likelihood of a reversion.

[Mike Preston]

Everything I've found so far deals with increased likelihood of reversion solely in the context of defined benefit plans. That doesn't mean that the line of reasoning doesn't apply to money purchase plans, just that I haven't found anything on point, yet.

My conclusion is the same as in my prior message, however. As far as I can tell, the only escape from 100% vesting upon amendment to a 0% formula in a money purchase plan would be to demonstrate that the cessation of contributions is intended to be temporary. I can see two ways of doing that, neither of which seem to be present in the OP's quesiton. First, immediately merging the plan into a profit sharing plan that provides for substantial and recurring contributions. Second, somehow argue that the formula is intended to be lowered only for a temporary time period, as in the case of business hardship likely to reverse.

OK, maybe that's the ticket. Was the OP's plan amended to zero in 1998 as a temporary measure? If so, maybe it it time to reverse it or to admit defeat and fully vest. I'd be willing to float a letter of determination application on plan termination which attempts to avoid full vesting retroactively if the circumstances leading to the amendment in 1998 were such that they supported the concept that the lowered formula was intended to be temporary. Same thing applies if the plan sponsor now wishes to modify the fomula to something other than zero. That is, submit the new formula to the IRS and argue that the prior amendment was, based on all the facts and circumstances, intended to be temporary. Now, of course, we have proof of that because it is in fact being amended.

In some business circumstances I could see justifying both the original amendment to zero and maintenance of the zero formula for a number of years, without requiring full vesting. But I would think this is precisely the case where competent counsel is a must.

[Tom Poje]

A little help for me on this one.

1.401-7(a) states that forfeitures reduce the contribution.

But I thought that was the old rule, and this no longer applies.

My book also says

Caution:The treasury has not yet amended Reg 1.401-7 to reflect changes made by P.L. 93-406.

so, without hunting down the PL, I figure someone else may have it handy and can share it.