Forfeiture during year of plan termination

[katieinny]

Fact set:

Plan Year July 1 - June 30.

Distribution to terminated EE occurs in August.

ER decides to terminate plan on February 28.

Forfeitures are added to ER contributions and allocated as of the next valuation date. Plan has annual valuations.

Does the EE become 100% vested because the plan termination is in the same Plan Year during which the participant received a distribution? Or, is the forfeiture reallocated to other participants because the EE received the vested portion of his/her plan balance before the decision to terminate the plan was made?

[david rigby]

Probalby depends on the exact plan wording. Most situations I see would require (at least) vesting of any participant whose employment severed in the plan year in which the plan termination occurred. I don't think date of payment is relevant, but check the document.

Other opinions?

[Kirk Maldonado]

I recall an ancient GCM that held that all participants who had an account balance at the time of plan termination must become fully vested, whether or not they were still employed on that date.

[Guest b2kates]

Kirk, I agree. I recall that it was expansive to include anyone who had not yet incurred the 5 one year breaks in service. I believe it was for a subsidiary of Exxon.

[Belgarath]

Here's what we do in the situation you describe. We contact the employer, and tell them they have the option: make them 100% vested, or file the termination with the IRS WITHOUT 100% vesting, and see if the IRS comes back and requires it. Naturally, the employer says file without vesting. We've done stacks of these, and I think the IRS has only required the vesting in less than 1% of the cases.

[Kirk Maldonado]

Belgarath:

The IRS determination letter, though, isn't immunity against a participant lawsuit. Even if the employer prevails, the employer will be out the cost of defending the lawsuit.

[Everett Moreland]

The ancient GCM is 39310, which is discussed on page 13-14 of Volume 2/Fall 2002, Employee Plan News

[Belgarath]

Agreed. Never had it happen. In nearly all cases, the participants who are partially vested are the NHC, and their forfeited amounts aren't generally worth filing suit, even if they do want to fight it, I'm guessing. Which brings up an interesting question, to which I don't know the answer. Suppose a participant does file suit? What can they collect? Are they limited to "equitable relief" or some such limitation, or can they collect punitive damages, etc.? Perhaps one of you attorneys can answer this.

We always advise our clients to consult legal/tax counsel before making decisions of this nature anyway, as it makes no difference to us one way or the other whether they vest or not. So either they never consult with counsel (which is likely) or counsel has never had a problem with the approach.

[KJohnson]

How about this scenario.

1) Calendar Year Plan provides that forfeitures will be allocated in the next plan year after forfeiture arises.

2) Plan provides that distribuitons only can be made at the end of the plan year following termination of employment.

3) A number of non-fully vestedl employees who terminated employment in 2001 (assume not enough for a partial termination) take their distribution in January through March 2002. This creates forfeitures.

4) Employer lays off all employees in November 2002 and goes out of business.

5) Plan provides that 415 excess will be put in a suspense account.

6) Plan provides that upon termination all amounts will be fully vested and unallocated amounts will be allocated but provides that any amounts that cannot be allocated in a 415 suspense account because of 415 limits will revert to the employer. (

5) Plan formally terminates in 2003.

What happens to the forfeitures that arose from those who took their distributions in 2002? They had already received a distribution and forfeitied the remainder of their account balance prior to the time the plan terminated as well as the time there was a "partial" termination due to the lay off.

It would seem that there is a good argument that the forfeitures would revert to the employer. You would try an "apply" them in the next plan year, but no one has any comp in 2003. Therefore any allocation would be over the 415 limit and all forfeitures would have to go into a 415 suspense account. The suspense account, under the plan's terms, reverts to the employer. (as permitted under 1.411(d)(2)-2(a)(2))