Forfeiture contributions used to reduce contribution. HELP!

[Guest EPS]

I am so confused. I hope someone can help me with this.

How does one deal with using forfeitures to reduce the employer contribution?

Here's the situation:

Maximum deductible contribution = 28,000

Client has already made deposit and filed tax return.

Plan is run, and it is found that there is a forfeiture of $10,000.

The document says to allocate in proportion to compensation. If there is excess due to forfeitures, then reduce the contribution. Well, there's an excess of $10,000.

Okay, so I know that I am supposed to enter $18,000 on the Schedule I of 5500 as the contribution because it is "new" money. How do I balance everything else out? Do I show $18,000 on the trust accounting also? The valuation reports will look okay, because the 10,000 is taken out of the forfeiture column and dumped in the contribution column, therefore showing a contribution of $28,000.

The other questions is, if the deductible amount is $28,000, but we can only really deposit $18,000, what does the accountant enter on the Schedule C?

How does this all work?

Can somenone shed some light on this for me?

[Guest SPOT]

Can't you just say that the contribution was $38,000. The ER took a deduction of $28,000 and the remaining $10,000 was fund from the forfeitures.

[Guest EPS]

Thanks for your reply...

I cannot allocate more than $28,000 because the 415 limits have been met for all participants (there's a MPP that is providing 10% contribution).

I could show $38,000 on 5500, $38,000 on trust accounting, exhbits, etc., but I can't allocate the full $38,000. I won't balance between the 5500, trust account and summary of accounts.

The document says that if the 415 limits are exceeded because of forfeitures, the contribution must be reduced.

Since I cannot allocate the full $28,000, which is the 15% deductible amount, do I need to tell the accountant that he needs to amend...or can he still show a $28,000 deduction on the schedule C?

Does anyone out there have a solution?

[Guest SPOT]

I may not have completely thought this out, but....

I think the deduction is still $28,000.00. You don't have a 404 deduction issue, you really have a 415 issue. Most documents I work with say to hold the excess annual additions in a suspense account. What document are you using? You may want to mention it as there may be people out there who are familiar with it.

[Guest SPOT]

Just to clarify my prior post, the docs I use say to hold the excess annual additions in a suspense account if I can no longer re-allocate the excess to anyone.

[Guest EPS]

The plan document says:

1) If the Participant is covered by the Plan at the end of the limit. year, the excess will be used to reduce ER cont. including any alloc. of forf. in the next year, and each succeeding year if necessary.

2) If the participant is not covered by the plan at the end of a limit. year, the excess will be held unallocated in suspense accnt. which will be applied to reduce future er cont. including forf. for remaining part. in the next year and each succeeding years if necessary.

3) If a suspense account exists at any time during a limit. year all amounts must be allocated to participant's accnts before any emplyer cont.

Max 15% cont. = $28,000

MPP allocation is 10%, therefore already 25% allocation to everyone. Can't increase contribution by forfeiture amount of $10,000. Right?

Help!

[Guest asire2002]

Here are my two cents:

Your document provides that forfeitures reduce the employer's contribution. The employer's actual cash contribution was $28,000, which was the calculated maximum deductible contribution. Only the actual cash contribution can be deducted; the fact that the total employer contribution was (or could have been) $38,000 due to $10,000 in forfeitures doesn't directly impact what can be deducted.

However, no amounts which are allocated to participant accounts in excess of the individual 415 limits are deductible. But I think that since it was the $28,000 in cash that was contributed first and deducted, none of that $28,000 caused 415 excesses, so the excesses are attributable solely to the forfeitures.

You cannot allocate the forfeitures without violating the 415 limits, so you have to take another approach. Follow the terms of your plan and allocate them in the following year as the plan document provides.

The 5500 would only show $28,000, since that was the actual cash contribution. The forfeitures relate to contributions made in prior years which were already disclosed on the prior years' 5500. Similarly, your trust statements should only record as a contribution the actual cash contribution that was made: $28,000.

[Guest EPS]

thanks asire

I understand what you are saying. I did show 28,000 on the 5500 and all other reports. Quantech reports show $10,000 in the suspense account. The Schedule C and 5500 will match.

I guess what was confusing me was the fact that if I can't allocate the forfeitures because of 415 limits, they would have to stay in the suspense account. The doc says not to keep forfeitures in the suspense account. It's like a catch 22.

Anyway, we're going to allocate the forf. next plan year when there will be no 415 problem.