415 annual additions

[7806akp]

ESOP passes the 1/3 test. However, by the time forfeitures are reallocated to participant accounts on the last day of the plan year, the plan is no longer leveraged because the loan has been repaid by returning the shares to the employer (the plan is terminating). Can the forfeiture allocations be excluded from annual additions under section 415 (pursuant to Reg. 1.415©-1(f))? On one hand, the forfeitures (when they occurred) were forfeitures of employer securities that were acquired with the proceeds of the loan. On the other hand, by the time the forfeitures were reallocated to participants, the reallocated amounts were cash.

[RLL]

ESOP passes the 1/3 test. However, by the time forfeitures are reallocated to participant accounts on the last day of the plan year, the plan is no longer leveraged because the loan has been repaid by returning the shares to the employer (the plan is terminating). Can the forfeiture allocations be excluded from annual additions under section 415 (pursuant to Reg. 1.415©-1(f))? On one hand, the forfeitures (when they occurred) were forfeitures of employer securities that were acquired with the proceeds of the loan. On the other hand, by the time the forfeitures were reallocated to participants, the reallocated amounts were cash.

Forfeitures of leveraged shares are excludable under IRC section 415©(6) only for a year in which contributions are deductible under section 404(a)(9) .... contributions by a C corporation that are applied by the ESOP to loan payments. That apparently is not applicable in the situation to which you're referring.

But if the plan is terminating, why are there forfeitures to reallocate .... as 100% vesting may be applicable. Also, what fiduciary decided to repay the ESOP loan by returning the shares to the employer?

[7806akp]

Forfeitures of leveraged shares are excludable under IRC section 415©(6) only for a year in which contributions are deductible under section 404(a)(9) .... contributions by a C corporation that are applied by the ESOP to loan payments. That apparently is not applicable in the situation to which you're referring.

The plan was leveraged until the last day of the plan year, so why would contributions not be deductible under section 404(a)(9)?

[ESOP Guy]

I think we need more information to answer this question.

When you say it passed the 1/3 test does that mean there were contributions to make loan payments during the year in question?

[7806akp]

I think we need more information to answer this question.

When you say it passed the 1/3 test does that mean there were contributions to make loan payments during the year in question?

I was trying to assume that it passed the 1/3 test. What happened is that there were no contributions to the plan for the year in question. The plan was terminated prior to the due date for the loan payment. Based on a literal reading of Section 415©(6) and the related reg, an argument is being made that the plan passed the 1/3 test because no more than 1/3 of the contributions that were deductible were made to HCEs. The argument is that there were $0 of contributions, so the plan automatically passes the "no more than 1/3" requirement. Although no deductible contributions were made to the plan, the employer could have made deductible contributions because the plan was leveraged for the limitation year. Let me know what you think.

(Btw, I would prefer not to get into the issues of 100% vesting and the fiduciary decision to terminate the plan and return the unallocated shares in repayment of the loan because I am already aware of the issues involved, though I do appreciate your thoroughness in trying to answer my question.)