Restoration of forfeiture

[Guest Do]

Could anyone help settle a difference in interpreting 1.411(a)-7(d)(2)(iii). This reg reads: Computation of benefit. In the case of a defined contribution plan, the employer-derived accrued benefit required to be restored by this subparagraph shall not be less than the amount in the account balance of the employee which was forfeited, unadjusted by any subsequent gains or losses.

Here are the two interpretations:

(1) The forfeited amount, unadjusted by any subsequent gains or losses, is the minimum amount that must be restored. Therefore, a plan may restore more than the forfeited amount and may restore the forfeited amount plus interest (for the time the participant was away from the plan).

(2) The minimum restored amount is the forfeited amount and the restored amount shall not be adjusted by any interest.

Which is right?

[Disco Stu]

Seems to me that if the regs meant "shall not share in earnings" then they would say that. I would qualify my answer by stating that most plans have specific language about how to handle restoration of forfietures. The few that I've looked at most recenly are more clear than the regs. They have stated that the amount restored definitely does not include any change in market value.

If you wanted to take the approach that earnings could be included, I would make sure that my plan was extremely specific about how those earnigns would be calculated. Many plans move forfeited dollars to a fixed income type of investment prior to reallocation or other treatment. Would the earnings be the fixed income rate, or the earnings that the participant would have earned had the money remained in the investements they had chosen. The latter approach would certainly result in headaches for employers. Heck, so would the first approach. It's just not worth it.