Share forfeiture used to reduce contributions

[Guest tmills]

Plan document says forfeitures are used to reduce company contributions. However, that is not workable in a leveraged ESOP with almost no cash available to buy the forfeited shares from the participants. We are thinking of reallocating, however there is no authority for that in the document. The other option is to amend, but there might be some retroactive amendment issues. I would appreciate any suggestions.

[BeckyMiller]

Is this a new document? I am generally opposed to making retroactive changes. Because usually, they aren't permissible. But, I have seen situations where the IRS has allowed a document to be cleaned up during the determination letter process, even for items that are not qualification issues. So, if it is a new plan that is within the Section 401(b) remedial amendment period, I would discuss this with counsel to see if it can be revised.

Speaking of counsel, I would also check to see if there was a reason that this language was used.

Or perhaps the language was a mistake and the infamous "scrivener's error" defense might be available.

In any event, I wouldn't disregard plan language. There doesn't have to be a "buy back" of the forfeited shares. It is just that if the employer wanted to contribute the full 25 percent of pay, it is stuck with that limit less the current value of any forfeited shares.

Then, I would correct it (assuming it needs correction after discussion with counsel) for the current and subsequent plan years.

[Alf]

Yes, isn't that the work-around. Declare the contribution as whatever they were planning on making, plus the forfeited shares. You end up reallocating by offsetting the forfeitures against the declared contrihution.

[Guest tmills]

Thanks for the suggestions. In this case the employer is having enough trouble coming up with the required loan payments. Alf, as I understand it you are advocating effectively converting the forfeited shares to cash and using that to "reduce" the contribution, then allocating the released shares using this larger contribution. However, I'm wondering about what happens if the shares released as a result of the contribution are different than the forfeited shares? Example: $100,000 loan payment due, 50 forfeited shares @$20 FMV, $10 cost.

$100,000 loan payment

1,000 forfeiture reduction

$101,000 total contribution

If based on the share release calculation the $100,000 would release 5000 shares and the $101,000 would release 5050 shares, then no problem. 5050 shares are allocated comp./comp. But if the numbers come out differently, say it is 4000 and 4030, isn't there a problem with 20 shares?

I'm all for dumping this back on the drafter.