Forfeitures held in suspense

[Guest SPOT]

I am working on a plan which uses forfeitures to reduce future employer contributions. The document does not state when the forfeitures should be used, just that they shall reduce FUTURE employer contributions. The ER has indicated to me that they have no plans for the next 1-2 years to use the forfeitures currently in a forfeiture holding acccount My initial response was that forfeitures should not be held in suspense that long. However, the document does not specifically say when the foreitures are to be used.

Any insight?

[Kirk Maldonado]

You should look at Rev. Rul. 80-155, 1980-1 C.B. 84.

[Mike Preston]

I don't think that RR is on point with respect to forfeitures, although I suppose one could read that into it.

I have run across a plan that spells it out in great detail that forfeitures are subject to allocation ONLY if and when a plan sponsor says so! In this particular case, the document is provided by a very large provider to thousands of plans, and the provider operates as the Trustee. The document states that the Trustee allocates forfeitures at the earlier of the regular statutory events (distribution of vested or 5-year rule) or, if later, the time when the Plan Sponsor sends a note to the Trustee saying: "Aw, go ahead, allocate the forfeitures."

So, do those plan sponsors have 7805b relief? If so, then I'd say you need to look at the document provision you have in place and see whether you, too, have such relief available and can have the forfeitures held in suspense until "whenever."

[Kirk Maldonado]

I agree that Revenue Ruling 80-155 does not specifically mention forfeiture accounts.

But it does state that suspense accounts are not permitted (except, for example, as authorized by the Section 415 regulations). I think that a forfeiture account should be treated the same as a suspense account for purposes of that ruling.

[Mike Preston]

Even if the document states otherwise, and has a letter of determination?

[Kirk Maldonado]

I wasn't aware of any authority that says that if the IRS makes an error in issuing a determination letter, that automatically revokes any relevant Revenue Rulings.

Now the issuance of the determination letter might preclude the IRS from revoking the qualified status on a retroactive basis, but it does not change applicable law.

[Mike Preston]

No arguments from me, there.

[mbozek]

I know of dc plans that maintained unallocated suspense accounts for amounts representing distribution checks that were not cashed or interest on the float from distribution checks before they were deposited and always thought that such accounts violated the exclusive benefit rule, the definitely determinable benefit rule and/or the Rev. Rul 80-155 requirement to allocate trust earnings and contributions in accordance with a definite formula. Under Reg. 1.401-7 a pension plan (mp plan) is required to use forfeitures as soon as possible to reduce future employer contributions. Reg. 1.415-6(B)(6) requires that excess contributions to a particpant's account must be reallocated among other participants in the next limitation year. I guess the question is why should forfeitures be exempt from allocation indefinitely. I recall reading a plr about 10 years ago in which the IRS disqualified a dc plan for maintaining an indefinite suspense account.