PS Plan term. and return of forfeitures to ER

[Guest hyper]

PS Plan is terminated. All PP have been 100% vested. Forfeiture account is used to pay expenses and offset ER contributions. The ER is not going to make any more contributions to the Plan (all are discretionary) and the forfeiture account far exceeds the expenses remaining. All liabilities under the plan have been satisifed. Can the forfeiture account be returned to the ER, with appropriate tax consequences ?

1.401-2 talks alot about returning funds from overfunded DB, but not about DC plan.

[Guest hyper]

Answered by own question - Rev. Rul. 71-149 prohibits return at plan term. Thanks anyway.

[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 which would vest 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.

[FundeK]

Why not have the employer make one final ER contribution that is the exact same amount as the forfeitures and use the forfeitures to reduce ER funding?

At my previous employer, we also reviewed (at ERs direction) all accounts that we paid out in the past 6 months to a year and often credited back the forfeitures to the people who forfeited during that time frame. This often used up the majority of the forfeitures.

[Guest hyper]

Thank you for the quick comments.

We do not want to declare a contribution to plan for issues unrelated to the Plan and we would like to distribute assets this year so waiting for a ER reversion of 415 suspense acocunt next year is not an option either (although both good ideas).

FYI - Plan provisions allows P.A. to allocate forfeiture account at plan term, so we have resolved the issue. Just needed to confirm if $ could revert to ER now.

Thanks again. Jim

[mbozek]

Forfeitures must be reallocated to remaining participants to extent the 415 limits are not exceeded. IRS termination guidelines specifically state that amounts held in a 415 suspense account that cannot be allocated to participants' acconts due to 415 limits must revert to er. See Reg. 1.401(a)-2(b). You should check the validity of the 71 ruling since it was issued before IRC 415 was enacted.

Since the reversion will be subject to both the 50% tax under IRC 4980 and income tax why not use the reversion to fund an anoather DC plan so that the reversion tax will be reduced to 20%?

[Blinky the 3-eyed Fish]

If the entire amount is used to fund another DC plan, the excise tax amount is $0.

[Mike Preston]

Depends on what your definition of "is" is. The excise tax amount remains 20%. Of course, it is applied against nothing, so the result is $0.

[ERISA1]

I know the original question is old, but the replies seem sound, and I have a question that picks up on everything addressed so far:

Background: I (too) have a plan in which forfeitures arose under a circumstance that was not a partial termination (i.e., a large group of employees voluntarily quit to form a competing company). The client's Mackay Hochman document does not appear to say when (if ever) the forfeitures must be reallocated. The plan says that forfeitures can be used to pay plan expenses. The prior TPA had been accumulating forfeitures so as to ensure it could be paid by the plan for a long time to come.

The plan is a profit sharing plan. There is no contribution obligation that must be offset. An amendment was added a few years back providing that amounts held in a forfeiture suspense account will revert to the employer upon plan termination. I believe the amendment was a word-for-word adoption of a model amendment. So, it should not aversely affect the plan's qualified status.

Last year, the company was shut down. All affected employees were fully vested. This year, the sponsor wants to terminate the plan. All participants who still have undistributed account balances will be fully vested. There is no compensation in the current year. So, the remaining forfeitures cannot be allocated this year because the 415 limit is $0.

Question: In the absence of a plan provision requiring reallocation of forfeitures in the current or any subsequent year, is there a rule or regulation that mandates when forfeitures must be allocated? (I'm not expecting any one to prove a negative, but I am wondering whether I'm missing some rule that will prevent the sponsor from claiming a fairly huge reversion.) The plan has a volume submitter approval letter. So, even if LRMs require plans to state when forfeitures will be reallocated, this plan appears to be silent. Can the employer get a reversion??

[PLAN MAN]

I think you need to look at the plan documents more closely. If this is a McKay Hochman prototype document I think is shoulc have several items that address forfeitures. The adoption agreement should say when forfeitures occur and are allocated (i.e., either in the plan year the forfeitures occur or in the plan year following), how forfeitures are applied (i.e., reallocated as additional contributions or reduce future contributions) and if forfeitures can be applied to pay plan administrative expenses. On the last point, the document should state further how any remaining forfeitures after paying plan expenses for the year are to be allocated. Usually it states that any remaining forfeitures are allocated as provided in the other election (reallocate or reduce).

It is always our recommendation that the record keeper not lump all forfeitures together, but keep each year separate. That way forfeitures can be identified and used appropriately for each year and not carried forward indefinitely. Isn't there some old IRS guidance that says forfeitures must be used each year?

It is my position if forfeitures are used to reduce a discretionary contribution, then in any year the contribution is determined to be $0 the forfeitures for that year are allocated as the only contribution.