Forfeiture Account Problem

[Guest halencourt]

We have a client that has terminated there 401(k)/Profit Sharing Plan. They have $11,000 in their forfeiture account. The document is set up to use forfeitures to pay down plan expenses. All of th employees have been paid out and all plan expenses have been paid...leaving the forfeiture balance. What is the best thing to do with this money.

Thanks

[E as in ERISA]

Allocate to participants and pay out (less any fees required to calc the allocations and make distributions).

[Guest halencourt]

Do they have any other options if they don't want to allocated to the participants.

[Fredman]

Originally posted by halencourt

Do they have any other options if they don't want to allocated to the participants.

What other option(s) would you propose?

[mbozek]

They can pay a 50% excise tax on reversions plus income tax which will eat up about 90% of the surplus. If the plan had not been terminated the er could have merged it with another qual. plan. Seriously making an allocation to the particpants is the best thing to do with the assets. By way this issue should have been handled before the participants were given their distributions.

[E as in ERISA]

I didn't think that you could do a reversion out of a profit sharing plan (except maybe one very limited exception that I can't recall and rarely applies).

[mbozek]

I think we have to deal with the issues presented in the context of the clients plan- If forfeitures can only used to reduce expenditures then the client must follow the terms of the plan. As I stated previously this problem should not have gotten to this point. Also the er doesnt want to do the right thing- allocate the forfeitures among the participants to make the problem go away. IRC 4980 does not distinguish between reversions of DC or DB plans. The IRS will accept the tax from all plans.

[E as in ERISA]

Based on previous answers, I'm guessing that Mr. Kirk Maldonado would say something to the effect of "Pay an attorney $11,000 to give you an opinion on what to do with forfeitures when the plan document only allows you to pay expenses (of which there are none) and the law generally doesn't allow reversions from profit sharing plans." Hopefully the better and cheaper answer is to pay the attorney to amend the plan and allocate the remainder to participants after expenses.

[Kirk Maldonado]

Katherine:

You know me too well.

[E as in ERISA]

I guess that I can add "mind-reader" to my list of qualifications!

[2muchstress]

We had the same scenario a while back and the plan paid an attorney huge sums of money from the forfeiture account. The attorney argued that because forfeitures could have been used to pay plan expenses, but the company paid the expenses out of company assets, then the forfs can be returned to the employer as a "reimbursement of plan expenses paid by the company".

I personally think it was an aggressive approach, but the attorney was a well known ERISA attorney who is well respected in our area, and he will be the one who gets to represent the client under audit.

[mbozek]

How is the return of the funds as a plan expense not a reversion of assets to the employer? I see no exception 4980. Also I thought that plan assets cant be used to pay settlor expenses.

[Blinky the 3-eyed Fish]

Mbozek, I am betting 2much was not referring to settlor expenses, but rather administrative expenses previously paid by the company that could have been paid from the plan.

[Kirk Maldonado]

The DOL has taken the position in recent guidance (I don't have the cite handy) that the plan can't reimburse the employer for expenses that the employer previously paid. I seem to recall that the plan required that the employer pay those expenses.

You might get a different result if the plan were silent on this point.

Also, not everyone always agrees with the DOL's positions.

[2muchstress]

Mbozek,

I agree with you, but I'm just the TPA. The plan's ERISA atty gave his opinion and we accepted it.

The only thing I can say is that the atty is pretty well known. I would tell you his name, but I don't think that would be fair to him.

Anyways, like I said, he will be the one who has to represent the plan if anything happens.

[Kirk Maldonado]

2muchstress:

Representing the plan on this matter is not a bad thing; it just means more revenue for the attorney. Paying clients who need assistance are what keep attorneys employed.

I'm sure that the attorney added enough caveats to his letter so that he isn't on the hook in case the government comes after the plan.

[mbozek]

The number of caveats is directly related to the amount of the fee. The larger the fee the greater the number of caveats in the opinion. I would sure like to know for my own clients how the attorney finessed the return of the expenses as not being a reversion of plan assets to th employer.

[E as in ERISA]

This is why it's better to hire an attorney on the front-end -- when you are establishing or amending the plan -- even if it's a prototype, volume submitter, etc. This may take you out of prototype status, etc. and may cost more. But you should get recommendations about better wording on forfeitures ("first to pay plan expenses, then allocated" instead of just "pay plan expenses"), expenses (making the plan primarily liable for legit plan expenses, but also covering the payment of expenses by the employer), etc. And hopefully it will save you from having to get caveated opinion letters later.

[Kirk Maldonado]

I can tell you that it is almost always much cheaper to get advice ahead of time. The cost of getting advice to avoid problems is usually a pittance compared to what it costs to fix problems after they have surfaced.

I had a client about 15 years ago that decided to do some ERISA work in-house to save a few hundred bucks. Quite predictably, they screwed it up. They ended up with a lengthy governmental investigation and paying a huge fine, and incurring significant accountant's and attorney's fees. I don't know the total bill, but it had to have been over $100,000.