Amend Use of Forfeiture

[12AX7]

401 (k) Plan currently uses forfeiture to reduce match contributions (discretionary match) in the plan year following the year when the forfeiture takes place. Forfeitures are not used to pay plan expenses.

Can the plan be amended currently to use the forfeitures to pay plan expenses rather than allocate for the current plan year? There's about $2,500 in forfeiture that would have been available for 2011 (from 2010 distributions) and an additional $2,500 in forfeiture that occurred from 2011 distributions that would have been available in 2012.

Is the use of this forfeiture considered a cut-back in benefit if used to pay plan expenses? The match is discretionary and employer does not wish to provide a match in 2011 and 2012.

Thanks.

[ETA Consulting LLC]

I would argue no if anyone has already met the accrual requirements for receiving a match. Even though the document says used to reduce, I believe the mere existence of the forfeiture balance would entitle such employee to a matching contribution for the year. To amend to have forfeitures pay plan expenses during the year would then seem to create a prohibited cut-back.

It's just one of those amendments I would make effective for the beginning of the year.

Good Luck!

[12AX7]

ETK - your answer was what I was about to deliver to the client, had I not thought more about this (maybe too much more). I see your point, but can you argue that even though a participant has already met the requirements for a match, this is still a discretionary component of the plan. If the employer does not wish to allocate a match for the plan year, is there a match to technically reduce by the forfeiture?

I'm more inclined to agree with you since these amounts were scheduled to become benefits for 2011, had the employer decided to make a match for the year. But, is there a way out of this and to use the forfeiture for expenses when no match is declared for the year?

[GMK]

Maybe I'm missing something here, but if participants have a match coming to them, does it matter if the match is made with forfeiture money or an employer contribution?

In other words, amending the plan to give the administrator the option to use forfeitures for plan expenses doesn't take away participants' rights to a match if the employer decides to allocate a match. It just means the employer has to fund the match if the forfeitures were used for plan expenses.

[ETA Consulting LLC]

This has actually been the subject of debate within the industry for the past 15 years. The argument goes to a situation where there is a forfeiture balance that is used to reduce as opposed to reallocate at year end. Many practitioners argue that if the employer contribution is discretionary, then you can retain the unused forfeiture balance in the plan since their is no contribution to reduce; as the employer's discretion was not the provide a contribution.

Other practitioners, including myself, would argue that there is still an employer contribution, but it was reduced to zero by use of the forfeiture balance; to do otherwise would seem to fail to meet the requirement that contributions are made pursuant to a definitely determinable allocation formula. May seem like a stretch, but it's the argument I chose to subcribe to.

With that said, I do understand and see your argument

[12AX7]

GMK - the match is discretionary, and the employer wants no allocations made for 2011.

ETK - I'm more inclined to agree with you because that would be the conservative approach and no one could argue that a benefit was taken away.

[Bird]

The plan actually hard-wires the forfeitures to reduce matching contributions? Ours say they can be used to reinstate forfeitures OR reduce contributions OR pay expenses.

Anyway, I agree it's not 100% clear but I think "no contribution" can mean "no contribution, period" and no one is entitled to anything yet.

[masteff]

Worst case scenario to me is: 1) prospective amendment of the plan so any new forfs are used to pay expenses and 2) simply declare a match that is exactly equal to the amount of forfs currently available.

[GMK]

GMK - the match is discretionary, and the employer wants no allocations made for 2011.

Understood, but I am unable to reconcile that with: "the mere existence of the forfeiture balance would entitle such employee to a matching contribution for the year" in post #2, which sounds like the administrator has no discretionary choice and must allocate the forfeiture balance as a match.

Otherwise, does the administrator "save up" the annual forfeitures until some year when they decide to allocate a match?

In any case, as a participant, if a match is declared and I'm entitled to an allocation, it doesn't matter to me whether you use forfeiture or contribution money for my allocation. If the amendment does not reduce the allocation amount to which I was entitled prior to the amendment, have my rights been cut back?

I don't mean to be argumentative. Just trying to understand. Thanks for your comments.

[masteff]

Reg Sec 1.411(d)-4, Q&A-1 (d): "Benefits that are not section 411(d)(6) protected benefits. The following benefits are examples of items that are not section 411(d)(6) protected benefits:" ... "(8) The allocation dates for contributions, forfeitures, and earnings, the time for making contributions (but not the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied), and the valuation dates for account balances;"

I read this as agreeing w/ GMK... the condition to receive an allocation of forfeitures for a plan year has NOT been satisfied because it's a discretionary match and said match has not been declared (nor will it be per the OP).

[GMK]

There's about $2,500 in forfeiture that would have been available for 2011 (from 2010 distributions)

Does this $2500 have to be taken care of (presumably, allocated as a match per the Plan Document) by the end of 2011?

For example, post #12 here:

http://benefitslink.com/boards/index.php?showtopic=45287

and this earlier discussion:

http://benefitslink.com/boards/index.php?showtopic=34327

Or am I mixing the apples with the oranges?