Forfeitures used to reduce future employer contributions

[Guest SuperMan]

Our plan document states that forfeitures should be used to reduce employer contributions and that employer contributions need to be paid in to the plan by the tax filing deadline plus extentions.

When we process forfeitures, do we need to use them to reduce employer contributions in the year in which the forfeiture happened or (if the employer chooses) can they be used in subsequent years? Our document does not explicitly state either way. Is there code or common practice that would assist in resolving this question?

For example:

- 1999 forfeitures of $1,000 on 12/31/99

- plan match is pay by pay & has already

been paid in to the plan

- no top heavy contribution required

- employer elected not to make P/S contrib.

What to do with the $1,000?

[Brenda Wren]

One common practice is to "sweep" the forfeiture account just prior to calculating and contributing the match contribution. In your case, yes, I would use the $1,000 forfeiture towards the next contribution. Although I don't like unallocated funds at all, in this case it appears you may be forced to show the $1,000 as a liability at year-end and use it to reduce next year's match. Alternatively, you might be able to allocate the $1,000 as an additional match if it's a discretionary match.

[This message has been edited by Brenda Wren (edited 11-24-1999).]

[IRC401]

There is a pre-ERISA revenue ruling that states (in effect) that the forfeitures have to be allocated for the year of forfeiture. (The Service's writing wasn't any better 25+ years ago.) As far as I know, the rule is still in effect. On the other hand, I have seen insurance company prototype documents (with IRS approval) that explicitly allow forfeitures to be allocated in the following year. As long as the forfeitures are being allocated promptly (for example, using December's forfeitures as part of January's match), I doubt that the IRS will bother you.

I strongly recommend NOT allocating in a subsequent year UNLESS your plan document so permits and the plan has a current determination letter. Furthermore, be careful that your plan administrator does not allow forfeitures to build up for several years.

[BTG]

As a follow up question to this (very) old post: Why is it that the $1000 of forfeitures discussed in the OP could not be used to reimburse the employer for the employer match already paid into the plan? Would this not be using forfeitures to reduce employer contributions? Thanks.

[K2retire]

It is more likely to be seen as a prohibited reversion of plan assets to the employer.

[BG5150]

Does the document have some sort of heirarchy for the forfs? Such as to use for ER contribs first, then maybe to offset fees?

And what would happen if there were forfeitures, but NO employer contribution for the year? Or if the employer contributon is less than the forfeitures?

[BTG]

BG and K2, thank you for your responses.

Yes, the plan does have a hierarchy: Forfeitures are first, used to reduce Employer contributions; second, used to offset the Employer’s Plan administrative costs; and third, any remaining forfeitures are allocated to Participants. If there were no employer contributions for the year or they were less than forfeitures, they would move down the hierachy. I agree with you that this would be the case any time that forfeitures cannot be used to offset the employer contribution.

However, is it the case that forfeitures cannot be applied to reduce employer contributions that have already been made? Don't get me wrong, I'm certainly not advocating this position from a prospective planning perspective. In our case, the client (suprise, suprise) came to us after the fact. They have already made all of the contributions out of pocket and now they want to know whether they can get reimbursed. I don't disagree that this is far from best practices; I'm just trying to figure out whether it's defensible.

[BG5150]

My understanding is the only money that should ever get sent back to the employer that was invested in the trust is money due to a mistake of fact. (Not a mistake, but a mistake of fact.) [There may be something about money left over after a plan termination, but I am not sure]

So, if there are no more ER contributions to be made, and all of the fees are paid, then the money should be reallocated to the participants. Hopefully the document shows the procedure for that.