403(b) Plan Termination

[waid10]

We are terminating our 403(b) Plan. We have a balance in the plan's forfeiture account. We want to distribute this to the current plan participants. The plan document is silent as to how to allocate these amounts. How is this done?

Thanks.

[J Simmons]

I would suggest that you adopt an amendment that spells out how forfeitures at time of 403b plan termination will be handled, and follow that.

You might consider specifying in that amendment an allocation among current plan participants as being a final plan year employer contribution (i.e., allocates per formula in the plan for employer contributions). You would likely be permitted alternatively to specify in that amendment that it will be allocated in proportion to account balances at time of termination.

[waid10]

I would suggest that you adopt an amendment that spells out how forfeitures at time of 403b plan termination will be handled, and follow that.

You might consider specifying in that amendment an allocation among current plan participants as being a final plan year employer contribution (i.e., allocates per formula in the plan for employer contributions). You would likely be permitted alternatively to specify in that amendment that it will be allocated in proportion to account balances at time of termination.

So it sounds like you are saying that we have the discretion to determine how we will allocate the forfeitures (i.e., there isn't a set formula or way it must be done). Is that correct?

[TLGeer]

Are you sure the document doesn't allocate forfeitures? My experience is that documents that create forfeitures allocate those forfeitures. An existing forfeiture allocation clause would complicate the analysis considerably, particularly if the employer action (e.g., corporate resolution) terminating the plan has already been taken.

Also, while salary reduction contributions are generally not subject to nondiscrimination testing, absent some exclusion (i.e., governmental or church plan under 403(b)) forfeiture allocations would be subject to nondiscrimination testing. Unless the forfeiture allocation is based on compensation during an available testing period, you should model the proposed allocations and test them for nondiscrimination.

Last, the termination provisions of the plan document may or may not be comprehensive. Any employer considering a plan termination should consider a termination amendment describing, and prescribing. what the employer actually intends to do, in enough detail to eliminate discretion in the termination process.