Forfeitures - Profit Sharing Plan

[Guest cease]

Plan states that forfeitures will be used to 1. reduce plan expenses; 2. restire benefits; 3. reduce matching contributions; and 4. reduce profit sharing contributions. The plan does not state when it has to use the forfeitures for these purposes.

Question #1: Without any specific language in the plan, can the plan sponsor hold on to forfeitures by paying plan expenses from the company and making full matching and profit sharing contributions in plan years that it has the cash, or does the plan sponsor have to use the money in the forfeiture account first?

Question #2: If the answer to question #1 is that the forfeiture has to be used first, then can the plan be amended to allow forfeitures to be used at a date in the future that the plan sponsor decides?

Thanks.

Note: This is a profit sharing plan

[FundeK]

Forfeitures can not just be carried from year to year until the plan sponsor decides to use them. The plan should address when they are to be used. What exactly is the wording in the document?

1. reduce plan expenses; 2. restire benefits; 3. reduce matching contributions; and 4. reduce profit sharing contributions

The plan sponsor could pay the expenses outside of the plan, which means the forfeitures would be used to reduce the match or PS contribution (I don't know what "restire benefits" means). I have always been told that if they plan sponsor has forfeitures available, but does not use them that it will affect their deductibility. (If they have $5000 in forfeitures that they do not use, they will lose $5000 deduction).

The prototype that we used at my previous employer allowed three options for the timing of using forfeitures. Forfeitures became available for use either

1. At the end of the year in which the forfeiture occurred

2. At the end of the year following the year in which the forfeiture occurred

3. At the end of the 5th year in which the forfeiture occurred.

[Guest cease]

FundeK.

Thanks for the response. The word "restire" should have spelled as "restore." This invloves situations where nonvested benefits need to be restored to participants.

The actual text is as follows:

Forfeitures, if any, will be applied first, to pay expenses and to restore nonvested accounts; second, to reduce the matching Contributions for contribution periods in the Plan Year (ans succeeding Plan Year, if necessary); and third, to reduce the Profit Sharing Contributions for contribution periods in the Plan Year (and succeeding Plan Years, if necessary).

In another section of the plan...

The nonvested portion of a participant's matching or profit sharing account shall become a Forfeiture as soon as practicable after the earlier of 1) the date the participant severs employment and receives a distribution from the plan or 2) the participant has 5 consecutive breaks in service.

I understand when the nonvested amount moves from the participant's account to the forfeiture account. I am looking for language that says when the forfeiture account MUST be used. I have reviewed several sources. One indicates that it is probably not OK to keep in suspense until the plan sponsor wishes to use, however the use of the word probably doesn't equate to yes or no.

The client interprets the document that the forfeiture can be used for the current plan year or any succeeding plan year and I am looking for something that agrees with that view or does not.

[Harwood]

1. Check the document closely, for words such as "Anniversary Date." That forfeitures must be allocated annually - except in rare circumstances - may be there in subtle language.

2. Check Rev Rulings 80-155 and 84-156

[Lame Duck]

My interpretation of the forfeiture language is exactly opposite to your client's. I believe the document specifies that the forfeitures must be used in the current year and, after all current expenses, matching contributions and profit sharing contributions have been made from forfeitures, remaining forfeitures, if any, will be carried forward to succeeding plan years. I believe the phrase "if necessary" indicates a carryforward only if the entire amount cannot be used in the current year.

[FundeK]

Is this a prototype by any chance? Could there be additional clarification in the Adoption Agreement .

[Guest cease]

Harwood, Lame Duck and FundeK

Thanks for the responses. I had looked at the revenue rulings mentioned. I have always believed that you use forfeitures as soon as possible. No, this is not a protoype plan.

I am going to stick with Section 1.401-7 - "The amounts so forfeited must be used as soon as possible to reduce the employer contributions thereunder," assuming that there are first no plan expenses and second no benefits to restore. If the client wants another answer, I will advise him to seek legal counsel.

It is comforting to know that more than one person feels the same way. Thanks.

[Harwood]

Thank you for pointing to Reg 1.401-7

[Guest Beachgirl]

After researching the board with forfeiture questions, I have also looked at the Rev Rulings cited (80-155 and 84-156 and Rev. Ruling 1.401-7) but can't really find the answer to a question that has come up.

All of our IDP plans (volume submitter) have language regarding the use of forfeitures that states:

"On or before each Anniversary Date any amounts which became Forfeitures since the last Anniversary Date may be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 3.7(d), be used to satisfy any contribution that may be required prusuant to Section 3.5 and/or 6.9, or be used to pay any administrative expenses of the Plan. The remaing Forfeitures, if any, shall be used to reduce the contribution of the Employer hereunder for the Plan Year in which such Forfeitures occur."

[section 3.7(d) - buy back of forfeitures, Section 3.5 - ommission of eligible employee, Section 6.9 - location of participant or beneficiary unknown]

Our question is this: since the language says "MAY" be used for plan expenses first, then remaining forfeitures "SHALL" be used to reduce, if the plan sponsor chooses to forgo using forfeitures to pay plan expenses throughout the year, and at the end of the year uses the remaining amount to pay employer contributions but then has remaining forfeitures, can he then use the leftover forfeitures to pay plan expenses? Does anyone know of any regulations that I haven't looked at that may address this situation, or any "pronouncements" from the IRS?

Thanks!