Haircuts - what happens to them?

[Guest RGlaser]

I have found a lot of information on the need to impose a penalty on an inservice withdrawal from a nonqualified plan, but no discussions on what happens to the haircut amounts.

When a plan imposes a haircut on an inservice withdrawal, where does the amount taken as the penalty go? Is it a forfeiture? Does it make any difference if there are employee deferrals in the plan? If these are forfeitures, are they reallocated, or used by the employer in some fashion?

Thanks for any help you can provide.

[TCWalker]

There aren't forfeitures (in most cases) as there could be in qualiifed participant account plan subject to vesting. There is no "account" the participant-beneficiary is entitled to receive in a DCP. The haircut reduces the employer liability to pay the deferred compensation to that employee by 10%, or whatever the haircut percentage. If the liability is informally funded under a rabbi trust the trust document usually provides a return of excess funding to the employer once a participant liability is fully satisfied.