Allocation of Contributions with Forfeitures to Separated Participants

[Guest DudeRay]

The subject plan provides that forfeitures of profit sharing contributions shall be allocated to eligible participants as of the last day of the plan year.

Participant A, who is partially vested in his profit sharing account, separates from service, receives a cash out distribution and forfeits the unvested portion of his account. Prior to his separation, participant A had satisfied the requirements for allocation of the company profit sharing contribution.

At plan year end, participant A is allocated his pro rata share of of the company profit sharing contribution. However, since he is only partially vested, he immediately forfeits the unvested portion of this contribution. This forfeiture, in turn, increases the amount available for allocation to ALL participants, including (presumably) participant A.

We are now in a "chicken and egg" loop. We can't determine the total company contribution until we determine the total forfeitures which we can't determine until we know the total company contribution etc., etc. etc. Is there a way (short of differential calculus) to resolve this issue? May we simply decline to allocate any portion of participant A's forfiture to him? May we carry over this forfeiture to the following plan year?

All suggestions will be gratefully received.

[Tom Poje]

I would disagree with logic cited.

suppose ee is 60% and his balance is $1000.

Thus he is paid $600 and forfeits $400.

Further suppose for the current year he receives $200 contribution.

He has not been paid any of his vested % of that amount, so there is nothing to trigger an additional forfeiture at this time- he has not been fully paid out.

[Guest DudeRay]

Many thanks, Tom, for the observation. Two factors relevant to this plan are: (1) earnings are allocated based on daily average balances, and (2) the plan provides for a single annual valuation as of the last day of the plan year (participants receive periodic statements of account from the investment provider). Thus, if forfeiture of the unvested portion of the company contribution is delayed until the following plan year, this contribution will generate additional earnings which would not ordinarily be allocated until the end of the following year.

I don't believe we are entitled to delay a terminating distribution this long. If we did, I don't believe it would constitute a "lump sum distribution" eligible for roll over. Thus, the employer seeks to "administratively" both pay the participant his vested portion of the company contribution and forfeit the unvested portion as of the plan year for which the contribution is made.

True, the "actual" payment and forfeiture would not take place until early in the following plan year. However, this is also the case with the company profit sharing contribution itself and this contribution is "accrued" as of plan year end. May we "accrue" the payout and forfeiture?

[Tom Poje]

lump sum doesn't come into play.

a rollover need only consist of 'any portion of the balance to the credit' (402©(1)(A)

and 402© (4) eligible rollover any distribution of all or any portion of the balance....[the exceptions are listed in this section e.g. min distributions]