Administering Buyback on Rehire after Forfeiture

[Guest Patrick Foley]

My client's plan "forfeits" the nonvested portion of the employer contribution account at the end of the plan year in which employment terminates. The forfeiture is restored upon the employee's return within 5 years, but only if the employee repays any distribution received.

This language has been in the plan for years, but till now it has never come into play.

A number of administrative questions pop up re the buyback: Does the employee write a check to the plan trustee or does it go through the employer--or is either method acceptable? Can (and must) the plan accept a rollover from an IRA to accomplish this repayment? If the repayment is after-tax, does the participant acquire basis in the plan account--and if so, does the plan have to track it and report it on a subsequent distribution? How is repayment treated on the 5500?

I hope someone who does these all the time can tell me how it ought to be done.

[CO Bank]

Hi Patrick,

We have a situation identical to yours. Did you ever receive a reply to your question?

Thanks,

Al Vanderhoeven

Bank of the Cascades

[JanetM]

We do allow it (am sponsor not TPA) in our four dc plans. Participant must returns to get reinstated forfeitures. Since only p/s sharing has vesting and match is on on pretax amounts all amounts must come in either as rollover from IRA or another plan. Amounts cashed out and taxed at distribution can not be returned to plan and receive reinstatement of forfeited amounts.

Look at plan and see is plan allows after tax sources and what types of rollovers you can accept.

[401_4_ever]

It's a pain, but the plan could probably allow after-tax money to come in for the buy-back, if the Participant didn't rollover when he took a distribution. You would have to track basis in an after-tax source.

The only other thing I would add is that the final 401(k) regs seem to require buy-back of Employer Contributions AND Elective Deferrals. There is a write up in the ERISA Outline Books about it. The short version is that the old ("proposed") final 401k regs excluded deferrals from the definition of a "vested balance", while the final 401(k) regs does not exclude it. The buyback regs provision requires repayment of that vested balance,and since deferrals are now included in the definition of vested balances they need to be repaid as well.

[jpod]

Janet: What authority are you (or your Company) relying upon in forcing participants to buy back only with pre-tax money? Do you have a citation for something specific, or are you simply relying on an interpretation of the Section 411 regulations? I am not being critical, but I'd like to know if I am missing something.

[JanetM]

ERISA counsel. Based on fact that only profit sharing has vesting. Profit sharing plan used to be separate plan from 401k. Profit sharing plan does not provide for after tax sources. Ergo you can not return after tax funds to profit sharing plan.

After we merged PS and 401k into one - the rule followed.

[PLAN MAN]

A couple of comments make me nervous.

First, I don’t think there is any authority in the regulations that allow a plan to forfeit the nonvested portion of a participant’s account at the end of the plan year in which employment is terminates. There must be an event that triggers the forfeiture, either the participant takes a full distribution of their vested account balance or the participant has five consecutive breaks-in-service. Until one of these events, the participant’s account cannot be forfeited.

Second, I don’t see where it is permitted that a plan can limit the buy-back option to pre-tax amounts only. The code provisions state the participant must have the right to repay the previously distributed amounts – limiting the repayment to pre-tax money seems to be reading too much into this. JanetM has the IRS reviewed this particular provision?

For administration purposes, it is much easier to refuse after-tax money, but can the plan really do that?

Finally, don’t forget to restore the account balance of a rehired 0% vested participant who was deemed to receive a cash-out distribution upon termination. This participant is now deemed to have repaid that distribution upon their rehire.

[jpod]

Plan Man, you've hit the nail on the head on the notion of forcing buy-backs with pre-tax money. Janet, unless your plans have determination letters that encompass specific plan language requiring pre-tax buybacks only, you should consider reviewing this issue with your ERISA counsel, probably with EPCRS in mind. This is an issue of vesting rights under Section 411 of the Code (and Title I of ERISA). If you design a plan to provide for an early forfeiture, then you have to allow for the buy-back in accordance with the Section 411 rules. I don't believe the buy-back rules permit you to require pre-tax buy-backs.

[JanetM]

We do have det letters. It is funny, in 8 years I have had two people ask about this when rehired. Most who take the cash out spend it and the ones who rollover don't oftern roll back to plan.

[jpod]

It is fortunate that you have determination letters approving this language. Hopefully IRS will not require you to change it on the next go-around.

I agree with your observation about buy-backs. In 25+ years of practice I don't think I ever was informed of a client situation where someone wanted to buy-back a forfeited defined contribution account.