Timing of forfeiture use

[Guest tman265]

Depending on what the document states, can forfeitures that occur in 2004 from a non-discretionary employer contribution account be used to fund the 2003 year end profit sharing contribution, if the contribution is not made until 9/15/2004 and the document states that forfeitures can be used in the current or following year?

My feeling is no, but everything I seem to find is unclear to me.

[FundeK]

I think it depends on how the document is worded. If it states that forfeitures are used to reduce employer contributions, and does not specify for the current year, or future years, then I think you might be alright.

Can you post the actual plan language?

[WDIK]

for the current year, or future years

If I read tman265's post correctly, it is referring to using forefeitures to fund the contribution for a prior year. This does not make sense to me.

[FundeK]

I have seen documents that state: "Forfeitures are to be used to reduce funding of current year or future year employer contributions" If tman's document states this, I do not believe the plan can use the current forfeitures to fund a contribution from a prior year. However, if the plan document mearly states that "Forfeitures are to be used to reduce the funding of employer contributions" then they could use it to fund a prior year's contribution.

[Guest tman265]

The document does state in current or next plan year. You have confirmed what I believe that current year means contributions for the current year, not for contributions in prior year but funded in the current year. I didn't want to tell my client no until I got a second opinion. Thanks guys

[FundeK]

If the document states "IN the current year", not "FOR the current year", I am sure. If is states IN the current year, that would lead me to believe that the $ can be used currently (for any year's cont), not that it has to be used FOR the current year's Profit Sharing contribution.

Does that make sense?

[WDIK]

Section 1.401-4(a)(1)(iii) of the Income Tax Regulations provides that funds in a profit-sharing plan arising from forfeitures on termination of service must not be allocated to the remaining participants in such a manner as will effect the prohibited discrimination.

My interpretation of this regulation would prohibit applying forfeitures to a prior year's contribution in at least some instances.

For example, if the plan allocates forfeitures immediatly upon termination or distribution, under a prior year allocation scenario, it would be possible for a portion of participant's 2004 forfeiture to apply toward that participant's 2003 contribution allocation.

[FundeK]

But, the forfeitures aren't being reallocated, they are being used to reduce ER funding. How would it be discrimination?

[WDIK]

I would argue that if the forfeitures reduce employer contributions, and the contributions are allocated among participants, the forfeitures are being allocated as part of the employer contribution.

[FundeK]

If that is the case, why are plans allowed to choose from

1. Reallocate to participants

2. Reduce Employer funding

3. Pay plan expenses?

If the reduce option is really reallocating, why even have the option?

[WDIK]

1. Reallocate to participants - This option increase the total amount allocated to participants, employer contributions plus forfeitures.

2. Reduce Employer funding - This option still allocates contributions plus forfeitures. The employer merely puts in less company money than would have been contributed if forfeitures were not used.

As to your question regarding discrimination a few posts ago, I did not indicate that the allocation would result in discrimination. My emphasis was on the language that forfeiture are allocated to remaining participants, not forfeiting participants.