Forfeitures

[ALBailey]

Is there any prohibition against an employer entering into an employment agreement that will make a partner whole for any forfeitures from a qualified plan? The employer would reimburse the partner with assets outside the plan and such reimbursement would be taxable to the partner. Does this violate any qualified plan rule?

[J Simmons]

I'm not aware of any QRP rule that would prohibit an employer from agreeing in advance to a severance payment equal to the amount that the partner will forfeit inside the QRP. Of course, the forfeited amount cannot be paid out of the QRP to the employer, although as a practical matter the employer will be credited in such amount against any otherwise required contribution from the employer for the plan year of reallocation.

Before doing so, you ought to also work through and consider the possible consequences under constructive receipt rules and 409A. The substantial risk of forfeiture being that the partner remains employed until topping out the QRP's vesting requirement? Food for thought.

[david rigby]

In addition to 409A, consider whether modifications to a qualified plan may accomplish the goal. In other words, define the goal first, then analyze how to reach it.