Forfeitures

[Guest Mbrockway]

Forfeitures are used to reduce administrative expenses. There are remaining forfeitures after expenses are paid. These will be carried to the following year for reducing the employer contribution because no one met the accrual requirements to receive an employer contribution in the current year. No employees meet the accrual requirements to receive an employer contribution the following year - what happens to the forfeitures?

According to the ERISA Outline, the forfeitures are allocated in proportion to how the expenses are paid (pro rata based on account balances) rather than in proportion to how an employer contribution would be allocated (pro rata based on compensation). It appears that the basic document is silent regarding this situation.

[Brian Gallagher]

i believe elective deferrals are treated as employer contributions, too.

[Guest Mbrockway]

This is a Profit Sharing Plan - no 401(k) provision.

[RTK]

Tough question without specific provisions in the plan document. Although I cannot think of any specific guidance off the top of my head (and I have not seen the ERISA outline), I think forfeiture are more like employer contributions than investment earnings. (For example, an allocation of forfeitures, like an employer contribution, is a 415 annual addition, while an allocation of earnings is not.) Thus, my vote would be to allocate the forfeitures in accordance with the plan's provisions for the allocation of employer contributions.

[Guest Mbrockway]

In response to RTK.....it is correct that it is treated as an employer contribution and not earnings. From what I have read in the ERISA Outline, the theory behind allocating forfeitures based on account balances is that administrative expenses paid by the plan are charged to the participants' accounts on a pro rata basis. Any forfeitures remaining should be allocated in the same manner.