When forfeitures have always been used to offset employer contribution

[John A]

A plan terminated and there will be no further employer contributions to the plan. There is still money left in a forfeiture account. The plan document calls for using the forfeitures to reduce employer matching contribuitons. Our first thought is that the forfeitures should be used to offset plan expenses and we believe the plan document does allow this. But what happens to any forfeitures if there is still something left after offsetting all expenses? Can or must it be reallocated to participants?

[Dave Baker]

Any language in the plan allowing a reversion to the employer, I wonder?

This actually happens sometimes in money purchase pension plans, and happened more frequently back when such plans were not allowed to reallocate forfeitures among other participants' accounts and instead had to use them to reduce the employer's contribution.

I guess you could amend the plan to specifically allow for reallocation of these funds if it doesn't already so provide.

[Wessex]

How are there still forfeitures when termination is a full vesting event?

[Alf]

Ditto the question from Wessex. The presence of forfeitures in this situation spells trouble considering the fact that forfeitures are not permited to remain unallocated after the close of a plan year (so the excess forfeitures would have to have occurred in the year of termination) and the termination would have fully vested all active participants (so the excess forfeitures would have to have come solely from accounts of participants who terminated prior to the proposed termination date).

If, after considering the above rules, there really are excess forfeitures, it seems like there would have had to have been a large number of terminations immediately preceeding the termination. You might consider whether a partial termination occurred.

Assuming that there is a surplus, don't forget about the expenses relating to the new law compliance amendments that are required to be adopted by terminating plans (whether or not they are filed with the IRS), the IRS Form 5310 filing, and the Plan's final Form 5500 filing. These expenses are often overlooked.

[david shipp]

FYI, several approved prototypes have language that allows reallocation of forfeitures in the plan year following the plan year in which the forfeitures arise. This appears to be a concession to administrative issues (despite old RR guidance that seems to indicate that forfs. must indeed be reallocated in the year they arise.)

[KIP KRAUS]

Ok Folks. What if the prototype plan has been frozen as to employer contributions since 1988, and the plan only allows for forfietures to be used to reduce employer contributions?

The plan is terminated in 1999, 11 years later, and there is still a balance in the forfeiture account, what then?

We currently have this situation facing us.

[Alf]

Again, technically, no unallocated amounts can remain in a dc plan after the close of the plan year (except 415 suspense accounts). As far as I know, this rule has not been officially "bent" for any reason. I suspect that its presence in prototype documents is a result of oversight rather than conscious acceptance by the IRS. If not, I would sure like to know about it.

If a plan has been frozen for 11 years, isn't it a permanent discontinuance of contributions (which is a full vesting event in itself)? A terminating plan should be amended to permit forfeitures to be applied against plan expenses and the expenses of amending and filing the plan with the IRS should be charged against the trust.

[Guest JCarren]

You could consider merging plan into another active plan to use excess funds to pay expenses, enhance earnings or even provide a benefit (via forfeiture allocation) in the second plan.

------------------

[This message has been edited by JCarren (edited 12-18-1999).]

[Lynn Campbell]

I would probably amend the Plan to allocate the forfeitures to the remaining participants.

[Guest lforesz]

We have a terminated plan with old forfeitures as well that will not be eaten up by administrative expenses (even projected expenses relating to the termination). We are going to do an amemdment to reallocate as opposed to reversion to the employer. Has anyone ever done this before? I'm questioning what method to use. I was thinking reallocation prorata based on current account balance. Any thoughts are greatly appreciated.

Lori:confused:

[mbozek]

Any nondiscriminatory method is ok. Account balance may not be ok if HCEs have the largest account balances. Better to allocate on the basis of each ee's comp to total covered comp.

[BFree]

I know that lforesz is not going to amend to allow reversion to the Employer, but could you do so with a PSP/401(k) plan? We have the same situation. Any caveats?

Thanks.

[Kirk Maldonado]

Here's a pragmatic solution. Hire an ERISA attorney to give you an opinion as to what to do with the residual funds, and pay his or her fees out of the plan. The legal fees should use up all of those funds, thereby solving the problem.

[BFree]

I'm talking over $100,000 in forfeitures, and while I don't begrudge anyone the fees they can charge, I hope an ERISA attorney's fees for this question wouldn't rise to that level.

[mbozek]

Keep the plan open until all forfeitures have been rellocated, e.g., 2002 and 2003 plan years.