Suspense accounts--can you confirm?

[lexi]

An ER has $x in plan forfeitures (being held in a suspense account) that cannot be reallocated to participants' accounts. It wants to use some of the $x to pay off plan expenses. However, not all of the $x is required to meet plan expenses.

The ER would like to keep the excess in the suspense account and use it for future plan expenses.

When I read IRC Section 415 and the regs, it seems to say that you have to apply the balance in a supense account to participants' accounts in the next plan year (or years), which says (to me) that the plan sponsor can't keep any surplus forfeitures in its own personal bank account to be used against the plan's future expenses.

Am I right or could a plan sponsor make its own little expense account out of unallocated forfeitures being held in a suspense account?

thanks in advance for any help.

[JanetM]

What does the plan doc say about forfeitures? Sponsor can't make its own account to set aside forfeitures. They remain plan asset until used to pay fees, reduce or augment contributions.

[lexi]

The plan doc says it can be used for plan fees or to reduce ER's c ontributions.

[JanetM]

So you set up forfeiture account - inside the plan. Pay fees from there. If there is some left you could allocate to participants.

[PLAN MAN]

The forfeitures should be used for the year in which they occur or, the following plan year if the document allows. The employer cannot choose to leave the forfeitures in the suspense/forfeiture account to pay future years' expenses.

You say the plan doc provides that forfeitures first are used to pay plan expenses and then any remaining forfeitures are applied to reduce the employer contribution. This can be applied several ways. I'd operate so that the forfeitures are identifed by plan year and those for any plan year are applied to the expenses accrued for that year, then used to offset the employer contribution for that year. If the employer contribution is discretionary and the employer chooses not to make a contribution for any year, I'd apply the remaining forfeitures as the only contribution for that year. The goal is to use the forfeitures and not let them accumulate in the suspense account.

[BeckyMiller]

I am so glad that you went to the regulations first. I agree with your reading. Forfeitures should not sit unallocated over multiple plan years. As a plan auditor, we frequently come across these accumulated forfeitures. Sometimes it is because the amount has been "forfeited" out of a former participants account for tracking purposes, but has not actually been forfeited - that is, the participant has not been cashed out or sufficient years of service have not yet expired. That is not my favorite internal accounting system, but not a violation of 415. Once the amounts are a bona fide forfeiture, they should be used by the end of the following plan year unless the amount is so large that there would be a 415 excess.

When we find these on audit, the amounts usually are not huge. We suggest that the client go to legal counsel for advice. That advice may be to treat them properly in the current year, allocate in the correct year, submit under EPCRS, etc. I do not recall anyone ever saying - ah, that is o.k. just continue to hold them....