Am I over analyzing?

[wsp]

401k plan administered by insurance company is currently taking the non-vested money from termed participants and placing them in a non-vested account. The participant is then made 100% vested in the remaining balance. They do not make those non-vested funds available to the company, which uses forfeitures to offset contributions. I don't have a problem with that, but they also don't allow the participant to trade that non-vested part of their account. So, should the participant make a trade in his original account and then rehire....we've got a problem. Or do we? Would the participant owe, or be owed based upon the earnings differential, a residual income amount once those forfeited funds are reinstated?

anyone else do this? I don't take forfeited money until the 5 year break or a distribution occurs, but evidently they don't follow this train of thought.

[Archimage]

I think you definitely have a problem but not necessarily with the terminated participant. I assume your document says that you forfeit on earlier of 5 yrs BIS or payout. If they are forfeiting the non-vested piece immediately then they are not operating in accordance with the terms of the plan document. The active participants are the ones that are getting reallocated forfeitures that they should or shouldn't be getting. What about the participant that becomes eligible after the terminee has reached 5 BIS? That participant is eligible for part of the reallocated forfeiture but will never get it now because it was forfeited 5 years ago incorrectly.

[wsp]

Forfeitures are used to offset contributions so that's not an issue. And the company is supposedly holding that forfeiture in a "non-vested" account until the 5 years is up. It's a new client and this is the second time it's happened with the first being prior to our hiring.

So that brings us back to the participant being the only one who could potentially be impacted. Are we infringing upon his rights to invest said assets by pulling the non-vested piece from him? If not, what's the practical difference between doing this and forfeiting the money? Either way the particpant is not controlling the earnings potential of those funds.

[Bird]

Unless the plan specifically says that term'd participants only control their vested balances (and I doubt it does), then I don't like it. As long as they ultimately take their money and forfeit the non-vested piece, no, it won't make a difference in what they (the term'd participants) get, but of course if someone is rehired their reinstated account would be different than it otherwise would have been.

I agree that it's a "not following the terms of the document" issue.

In cases like this, it makes you wonder what they're trying to accomplish. Sounds to me like it makes things more difficult, not less.

[ERISAnut]

I don't like it either.

The major issue here is that there is nothing in the IRC that provides for forfeiture upon termination of employment. The provision is 5 consecutive one-year breaks in service (or termination and cashout), in order to a forfeiture to occur. It is actually possible for a participant who has not terminated employment to incur 5 consecutive breaks in service (less than 501 hours during each year to 5 years).

The most common way to incur 5 consecutive breaks in service is to terminate employment. Hence, the public gets confused by now associating termination of employment with forfeiture while it is merely a quicker way to lead toward forfeiture.

I think we all agree on this. The major point of disgust here is that some practitioners (such as your insurance company in this case) hadn't figured it out yet. You normally wouldn't expect an employer to know this off hand, but a simple explanation to this would get them on board. Until the IRS steps in an enforce the rules that are there, these types of practices will continue.

[Guest msladky]

Only being able to direct vested dollars sounds like a potential issue under 410(b).

[WDIK]

Only being able to direct vested dollars sounds like a potential issue under 410(b).

Could you elaborate?

[wsp]

Only being able to direct vested dollars sounds like a potential issue under 410(b).

Could you elaborate?

I think msladky is going on the assumption that all non-vested dollars are not being directed instead of just the termed non-vested dollars. If it's all non-vested then I would think that 410(b) could come into play because it would almost be the same as if that contribution never took place. How can you call it a contribution if they can't invest it. I think it's a reach , especially if it's spelled out that way in the plan document, but plausible nonetheless.