Violation of Exclusive Benefit Rule?

[lkpittman]

We have an gov't employer with a qualified pension plan that provides for employee contributions and an employer match. The plan also provides that any forfeitures of the match be applied to reduce the matching contribution amount. Because they contribute match each payroll with the employee contributions, they contend that it would be too difficult adminstratively to offset the matching amount with the forfeitures and would like to instead go ahead and contribute the full match on a payroll basis and receive a "reimbursement" at the close of the year of the matching forfeiture amount which should have been used to reduce the amount they are putting in on a payroll basis. Any thoughts as to whether this might be considered a "reversion" or other violation of the exclusive benefit rule?

------------------

LKP

[Guest RS Vatalaro]

I have run into this many times, and don't have a cite for you, but...

IMHO, if the employer "reimburses" itself as it wants to, there is no clear way to prove to the IRS that the reimbursement is directly tied to the match, e.g. no audit trail.

Even though the end result in terms of $ is the same regardless of whether there is a direct off-set or a reimbursement at the end of the year, I've always heard pension professionals say it is better to not go the reimbursement route because of the inability to prove the employer used the funds to off-set the match, as opposed to, say, paying the company electric bill.

[Everett Moreland]

This would violate the exclusive benefit rule.

[lkpittman]

Thanks for your input. After more research, I am in agreement that this would be a violation. We may, however, rely on Rev. Rul. 91-4, 1991-1 CB 57 for the current year and go ahead and "reimburse" the forfeiture amount; but amend the plan so that in subsequent years the forfeiture is simply allocation in addition to the match. Rev. Rul. provides that A plan may provide for the return of a contribution made by an employer to the plan if the contribution is made by reason of a mistake of fact. The amount that may be returned to the employer is the excess of: 1) the amount contributed, over 2) either (a) the amount that would have been contributed had no mistake of fact been made, or (B) the amount that would have been contributed had the contribution been limited to the amount that is deductible after any disallowance by IRS (whichever of (a) or (B) is applicable).

We may be going out on a limb here . . . but this is a takeover plan and we "uncovered" the problem on our first year of review. The employer had NO IDEA that forfeitures were supposed to be used to reduce contribution. It's unclear what prior TPA was doing with forfeitures (we think simply allocating them along with earnings--their accountings are a mess). Any thoughts?

------------------

LKP

[Everett Moreland]

91-4 will not cover you. The mistake of fact exception is very narrow. I recommend that you think of another way to deal with the current year's problem.

[lkpittman]

Again, thanks for your input--the atty I work for is considering the options . . . .

------------------

LKP