Forfeiture reallocation

[Guest Jodi S.]

I'm looking at a prototype profit sharing plan that states that: Forfeitures occur as of the earlier of (1) the last day of the PY in which the former participant incures 5 consecutive 1 year breaks in service, or (2) the distribution of the entire Vested portion of the Participant's account AND the forfeiture will be disposed of in the PY in which the forfeiture occurs. Pretty standard. Forfeitures may be used first to pay admin. expenses and the remainder will be "allocated to all Participants eligible to share in the allocation of profit sharing contributions or Forfeitures in the same proportion that each participant's compensation for the PY bears to the compensation of all participants for such year." This plan has variable annuities for investments and can't have a forfeiture account set up using the same investments. The investment co. wants an allocation of the nonvested money of a distribution at the time of the distribution. It seems to me that the allocation can't be made until the end of the year to find out the % of compensation, but that it also has to be done before the year end (since the forfeiture is to be disposed of in the PY in which the forfeiture occurs). It doesn't make sense for that to be in the document if it's not a feasible option. Can we use the 2009 compensation to determine the % of comp for the participants' reallocation or do we have to wait until the final payroll in 2010 and then quick get the allocation done as of 12/31/10?

[Bird]

"forfeiture will be disposed of in the PY in which the forfeiture occurs" has to mean "forfeiture will be allocated in the PY in which the forfeiture occurs" which means you do the calcs in 2011 using 2010 data. (Does the doc really say "disposed of?")

As to the investment company's dumb, made-up rule about allocating at the point of forfeiture, you're either going to 1-best) convince them to leave the money in the participant's account until you can allocate it in the following year (or be passive/aggressive and refuse to provide them with allocation info and see what they do about it), or 2-lousy) move the money to a temporary holding account, probably a checking account at bank.

[Guest Jodi S.]

(Does the doc really say "disposed of?")

Yes - the doc really says disposed of. Thanks for confirming my thoughts.

[Guest Brian Theismann]

As an IRS agent, I suspect that, if you use 2009 compensation levels and any of the NHCEs receive less than they would have received using 2010 compensation, the IRS would assess the trust as unqualified.