Excess contribution and forfeited match

[Sully]

A client has a calendar year 401(k) plan with a match of 25% on the first 6% of deferrals. The match is funded annually after the end of the year. They have not yet made the matching contribution for 2003.

For the 2003 plan year the plan fails the ADP test so we are returning excess contributions to two of the HCE’s and will forfeit their related match. The plan document says forfeitures are to be used to reduce the employer’s match.

When the match is made a portion of it will be forfeited and the forfeitures are supposed to reduce the match. But, how can it reduce the match if the full match has already been made?

Since we cannot use the forfeiture to reduce the 2003 contribution could we use it to reduce the 2004 match?

Any comments would be greatly appreciated.

[pmacduff]

You said the "match is funded annually and the 2003 contribution has not yet been made"... If you have not made the contribution, you can net the forfeiture amount out before depositing the match $. Why do you think you have to deposit the entire amount for 2003 and then think about forfeitures? In my view, that's one of the positives of an annually funded match as opposed to per pay period deposits!

[Tom Poje]

I think you still have to make the full match deposit because the document says 25% up to 6%. Have to follow the terms of the document.

I would hold that the forfeitures would reduce 2004 amount since the actual distribution of excess didn't take place until 2004.