DC plan termination

[Guest cpamichael]

When a DC plan terminates, can the balance of the balance of the forfeitures revert to the sponsor/company?

[chris]

IRS may require those amounts to be restored to the terminated participants. In other words, IRS may say that the participants from whose accounts those forfeitures were generated are "affected participants" and must be 100% vested. Are you submitting a Form 5310 w/r/t the termination?

[Guest cpamichael]

The forfeitures that reverted came from plan participants that terminated employment before the announcement and effective date of the plan termination.

The plan has not filed a 5310 and is unlikely to do so (unless pursuaded otherwise).

I know the participants employed on the termination date became 100% vested, but what of the participants that terminated employment before then (whose forfeitures reverted)? Other than the partial termination rules, is their some sort of look-back that might pull those participants into the 100% vested calss? In the unlikely event the employer rehires any of that class of employees, would any forfeitures require repayment either befire or after final plan termination and distribution of assets?

[KJohnson]

The one situation that I have seen where a "reversion" is possible is as follows:

1) Forfeitures occur in the year of termination prior to the actual termination of the plan. There is not a partial termination vesting these participants prior to the formal termination of the plan.

2) The plan provides for an allocation of forfietures in the plan year after the plan year in which the forfieture occurs.

3) Along with the termination of the plan, all employees are terminated as well.

4) No allocation of forfeitures are possible in the next plan year because not only has the plan been terminated, but no participant will have any compensation. Thus any allocation of forfeitures according to the plan terms will be a 415 violation. The forfeitures would have to be placed in a 415 supsense account.

5) The "return" of a 415 suspense acccount to the plan sponsor is the one exception to the rule that dc plans cannot have reversions.

[mbozek]

There will not be much left to revert to the er since a 50% excise tax will be imposed on the reversion (IRC4980) plus ordinary income tax. Better to use the excess to pay plan expenses or vest all participants in their accounts than give it to the IRS. Besides it not worth the time to determine if the benefits of the terminated participants can be forfeited. Excise tax can be avoided if er merges terminating plan with another plan.

[KJohnson]

MBOZEK-- I don't really disagree...however some employers think 50% is better than nothing. Also, in my situation I was dealing with a bankrupt employer and there were "asset of the estate" issues.

Also, to do it your way your probably have to have a plan amendment to allocate forfeitures to expenses (I presume that this is not in the plan already or the question would not have been asked). To fully vest you would need a plan amendment if you come to the determination that you did not have a partial termination when the employees who received the distributions that caused the forfeitures terminated employment.

[mbozek]

A one line plan amendment or board resolution is still cheaper than researching the issue. I would rather see the participants get the excess than the IRS.

[Guest cpamichael]

Forfeiture or unallocated discretionary comapny match contribution?

Here is the letter the Company issued to the Administrator during the termination process to obtain the funds in the forfeiture account:

The purpose of this letter is to authorize [Administrator] to return to [Company] all funds currently in [Company]'s forfeiture account. [Company] will not be allocating those funds to any plan participants.

Those funds were originally deposited into the account in 1999 [NOTE: Plan and Company have a fiscal year that ends July 31. "in 1999" refers to a Company contribution accrued for the Plan year ended July 31, 1999 and paid subsequently within the time frame necessary for the Company to take an income tax deduction for the year ended July 31, 1999] with the intent to distribute to participants after [Company] had completed its year ending certified audit. That audit showed that [Company] did not earn enough net profit in 1999 to justify an allocation of the monies to the fund participants... No mention of allocation or promised distribution was ever made to the Plan participants at that time.

Company made a decision to keep the funds in the account to enable the corporation to allocate to the fund participants in the future should the corporation decide to do so. To date, we have not chosen to do that.

Please return the remaining funds to [Company]...at your earliest convenience.

Between July 31 and October 15, 1999, the former administrator/custodian proposed a match allocation for the contributions. The Company terminated the administrator/custodian. The former administrator/custodian transfered all the plan assets, including the Company contribution-in-limbo to the new administrator/custodian. The new administrator/custodian deposited the Company contribution-in-limbo into the forfeiture account. Susequently, the new custodian appointed a new administrator and trustee. The letter (above) was addressed to the new administrator. That administrator segregated forfeitures by year, leaving the unallocated Company contribution with other forfeitures of that year. On December 24, 2002, the new administrator directed the custodian to pay the balance of that forfeiture account to the Company. All of the administrators and custodian are large and nationally known.

How does this information change the response to my original question, if at all?

[RTK]

My quick comments: (1) Regarding forfeitures, my recollection is that the IRS's position is that all accounts must be 100% vested upon plan termination unless the particpant had five consecutive breaks in service or had incurred an early forfeiture event under the cash out rules. I assume the dollars in the forfeiture account are forfeitures under the 5 year rule or cash out rules, and thus, not required to be vested in participants. (2) Regarding reversion, my recollection is that is a dc plan reversion is permitted under the Code for dc plans only for amounts held in a 415 suspense account that cannot be allocated.

[KJohnson]

RTK's recollection is the same as mine. You have to get the forfeitures over to a 415 suspense account in order for a "reversion". Really the only way to get them there is if the forfeitures would be allocated to participant accounts and all of the participants have been terminated and have $0 comp so that allocation of any forfeiture would be a 415 violation.