Unallocated forfeitures

[Guest KLM3]

A client has a balance in its forfeiture account that has accumulated over several plan years. The plan document allows forfeitures that have accumulated since the last anniversary date to be used reinstate previously forfeited accounts, pay any plan expenses, reduce employer contributions, or be realloacted among participants. Has anyone encountered a similar situation with respect to accumulated forfeitures that failed to be allocated timely, if so, how was the situation handled? Will the client have to go back several years and allocate the forfeitures in the years they should have been allocated, or is there an alternative method for handling this? Any suggestions would be appreciated. Thanks.

[rocknrolls2]

In general, the assets of a defined contribution plan have to be allocated among all plan participants and there should be no unallocated amounts. When the 415 regulations specifically provided for the correction method, a suspense account containing forfeited or reduced employer contributions was permitted to last beyond the end of the plan year but had to be fully allocated in the following plan year. In fact, no employer contributions were permitted to the extent there was a balance in the suspense account.

In your situation, you should use some sort of self-correction. However, this will depend on how much is involved and the number of affected plan years. If there is a good bit of money involved over several plan years, then technically there should be a Voluntary Correction Program filing with the IRS. What is done depends on what the plan provides on the application of forfeited balances. The easiest situation is if the plan states that forfeitures are to be allocated among the plan's participants. If that is done, then all participants entitled to the allocation should have an additional amount allocated to their accounts in each year. However, if the plan provides that forfeitures are to be used to reduce employer contributions, there could be a problem because less should have been contributed during the relevant time frame. Did any participants who had a partially vested account balance terminate employment, receive a distribution and were then rehired within five years? If so, they have a right to repay the vested portion of the amount distributed to them and the plan has to restore the forfeited balance. If this has happened, the plan may need to be amended to provide that forfeitures may be used to restore forfeited account balances for participants who timely repay. Another option is to use some of the forfeited amount to pay plan administrative expenses (make sure that the plan either permits such an application or that the plan is amended prior to the application of the forfeitures for such purposes).

[Guest KLM3]

Thanks rocksnrols2