Terminating 401K Plan

[Guest NJCompany]

Our company is terminating our 401k plan. Can the amounts in the forfiture fund be paid back to the company or do they have to be distributed to the active participants.

[JanetM]

Depends on what the plan says. It should be spelled out.

[Guest NJCompany]

Its simply does not mention anything about the forfeitures monies when shutting down the plan.

Mike

[RTK]

Returning these assets could raise exclusive benefit issues. Generally only assets held in a 415 suspension account can be returned to the employer. See IT Reg. 1.401(a)-2. See also Rev. Rul. 91-4 for other permitted reversions.

[Richard Anderson]

I have the same question as Janet. What does the document say happens to forfeitures? Reduce contribution? If reallocated, to whom?

[mbozek]

If the plan does not specify what is to be done with forfeitures it should be amended before terminaton. You should also review Reg. 1.415-6(B)(6) which provides for the allocation of suspense accounts to participants before the employer may receive a reversion upon plan termination. (Usually forfeitures are transferred to a suspense account or used to reduce employer contributions) Finally a reversion to the employer is subject to a 50% excise tax under IRC 4980. As a general matter forfeitures should be allocated among the participants since the combination of the reversion tax and ordinary income tax will consume the entire surplus.

[JanetM]

If the plan says nothing about forfeitures at termination, does it say anything about the non-reversion of assets to the employer?

I would amend the plan, allocate the forfeitures and payout the assets.

[mbozek]

A Plan drafting point: While is preferrable that a plan include a provision disposing of forfeitures at the time it is adopted, there is no requirement that the plan contain such a provision. Many attorneys omit such a provison on the theory that the employer will determine how to dispose of such assets when the plan is terminated.