Reinstatement of Forfeitures

[DP]

I finally have a plan participant who wants to pay back her rollover distribution in order to restore the Profit Sharing balance she forfeited. Her rollover distribution consisted of 401k, Non-Elective Safe Harbor, and Profit Sharing balances.

This participant rolled over her distribution from the plan into a conduit IRA. This money in the conduit IRA, which has now gone down in value, is coming back into the plan. Wouldn't the participant have to contribute enough money for the loss in earnings so the actual distributed amount would be restored to the plan?

When the money comes back in, I assume it should be deposited back into the original sources of money, and not classified as a Rollover source.

Is there anything else I should be aware of?

[J Simmons]

To be entitled to forfeiture restoration, she must contribute to the plan following re-hire the full amount that was paid out to her, unadjusted by investment earnings (losses). Is she repays the full amount that was paid out to her, it should be tagged as 'the original sources of money' rather than 'Rollover'.

Make sure that she does so timely--5 years of rehire.

Also, when making the restoration of the forfeited sums, it should come from sources specified in the plan document.

[ERISAnut]

However, she must repay only the amount contributed to her from the Profit Sharing Source of funds. The 401(k) and Safe Harbor portions has nothing to do with it. She would only refund the vested profit sharing portion.

[DP]

However, she must repay only the amount contributed to her from the Profit Sharing Source of funds. The 401(k) and Safe Harbor portions has nothing to do with it. She would only refund the vested profit sharing portion.

I hadn't thought about that aspect. So if she returns all the money that was rolled over to her, anything above the original Profit Sharing distribution amount could come back into her account as a Rollover?

[K2retire]

However, she must repay only the amount contributed to her from the Profit Sharing Source of funds. The 401(k) and Safe Harbor portions has nothing to do with it. She would only refund the vested profit sharing portion.

I've always heard that she would have to repay all money sources. Is that something that might vary according to the document?

[DP]

However, she must repay only the amount contributed to her from the Profit Sharing Source of funds. The 401(k) and Safe Harbor portions has nothing to do with it. She would only refund the vested profit sharing portion.

I've always heard that she would have to repay all money sources. Is that something that might vary according to the document?

Good thought. I better pull out the plan document to see if it specifies in the plan document what must be paid back.

[DP]

However, she must repay only the amount contributed to her from the Profit Sharing Source of funds. The 401(k) and Safe Harbor portions has nothing to do with it. She would only refund the vested profit sharing portion.

I've always heard that she would have to repay all money sources. Is that something that might vary according to the document?

The plan document states: If a Participant has less than a one hundred (100) percent vested and nonforfeitable interest in his Non-Elective Account (or Matching Account), receives a distribution from such Account, and later resumes employment covered under the Plan, his entire Non-Elective Account (or Matching Account) shall be restored to the amount on the date of distribution if the Participant repays to the Plan the full amount of the distribution from such Account.

So according to the plan document, it sounds like only her NonElective balance has to be repaid. She did not have a Matching Account balance.

[BG5150]

I have TWO follow-up questions here:

1. In a case wherein the participant takes a distribution payable to herself, how do we treat the tax withholding amount being returned? It's my understanding that she would have to make up the amount withheld from her own funds.

But, would that create basis in the account? Assuming this has occurred after she's filed her taxes for the year of distribution. Would we have to separately account for that money as "after-tax" but still on the vesting schedule?

2. What if the person was 0% vested in the source--Profit Sharing in this case. Does she have the right to have the amount reinstated? Or, because she had no non-forfeitable money, she's not entitled to it? I have someone who has two years of service on a 3-yr cliff schedule. Would it matter if she had any deferrals, since they are 100% vested at all times?

[Tom Poje]

first, reading through this thread raises an issue about what needs to be 'paid back'

the old regs , under 1.401(k)-1©(2)(1)(ii) stated "The contributions are disregarded for purposes of applying section 411(a) to other contributions or benefits." [it's nice that I still have that buried in my copy of the regs]

the new regs 1.401(k)-1©-1 state they are disregarded for purposes of applying section 411(a)(2) - this section only applies to vesting. your guess is as good as mine why this was changed. no, wait, your guess is probably better than mine, I'm terrible at guessing.

so the new thought is that a buy back would have to include deferrals. (see also ERISA Outline Book chapter 4 section VI 2)

a zero % vested person by terms of the document is 'deemed' to have received their distribution. I'd hold, therefore, upon return, they are 'deemed' to have paid back that portion, and forfeitures should be restored, assuming, that if deferrals were distributed they were also paid back - at least based on the above comments.

sorry, I don't see anything written up one way or another as to how to treat such pay backs - its gotta be out there somewhere.---oooooooooooppppps. I had a vision - look in Chapter 7 of the ERISA Outline Book. A basis is created Chapter 7, section III part D