Rehired Employee - “buy-back” of forfeited amounts

[Nassau]

A Participant terminated from the ABC Plan on 2/28/2011 and rolled their money out of the ABC Plan into an IRA ($25,384.49). The non-vested money was then forfeited. The participant realized that they had an excess deferral in the amount of $786.02 and asked for the excess deferral to be distributed out of the ABC Plan but the plan does not provide for the distribution of excess deferrals. The participant took a distribution of $786.02 from the IRA as an excess deferral.

The participant has subsequently been rehired in the ABC Plan and would like to have forfeiture reinstated. Typically, the entire amount withdrawn needs to be restored, even if the part has to make up that amount out-of pocket. Two questions arise:

Question: Should the $786.02 be included in what is paid back to the ABC Plan in order to have the nonvested money reinstated?

[Lou S.]

No. The $786 was not eligible for rollover in the first place.

[masteff]

I concur, but document it by getting proof from the EE that it's being treated as an excess deferral on their taxes and by the IRA.

[ETA Consulting LLC]

I have never subscribed to the idea that amounts from sources other than the non-vested source for which the forfeitures were made be redeposited in order to have the forfeitures restored.

Good Luck!

[Lou S.]

I have never subscribed to the idea that amounts from sources other than the non-vested source for which the forfeitures were made be redeposited in order to have the forfeitures restored.

Good Luck!

I like that idea and have always thought it was how it should be but I've never been able to find anything in the code or regs to support it. Do you happen to have a cite to support that because prospectively I'd love to be able to take that position.

[ESOP Guy]

I would add when this question first came up I looked at the base document for most of our prototype plans it seems rather clear you have to pay back everything that was paid out regardless of source.

So I would check one's document also.

However, none of us have given a good answer to the actual question. I am guilty also.

[Lou S.]

I would add when this question first came up I looked at the base document for most of our prototype plans it seems rather clear you have to pay back everything that was paid out regardless of source.

So I would check one's document also.

However, none of us have given a good answer to the actual question. I am guilty also.

This is the 2nd thread on the same topic. I gave an answer in the other thread that someone else agreed with that since the excess deferral is NOT ELIGIBLE FOR ROLLOVER, it should not be restored.

I just thought ERISAtoolkit had a very interesting idea that I thought might be helpful in the future.

Though if I remember correctly I think I found the same thing our document the last time this came up so even if you can do what EtK is suggesting is possible, we might not be able to do it our plans anyway.

[Tom Poje]

should pay back include deferrals?

the old regs , under 1.401(k)-1©(2)(1)(ii) stated "The contributions are disregarded for purposes of applying section 411(a) to other contributions or benefits." [it's nice that I still have that buried in my copy of the regs]

the new regs 1.401(k)-1©-1 state they are disregarded for purposes of applying section 411(a)(2).

Note the subtle change. the rule now only applies to vesting.

so the new thought is that a buy back would have to include deferrals. (see also ERISA Outline Book chapter 4 section VI 2(f)(3))

or as one of my buddy's used to say whenever we played hearts

"pay backs are hell"

all that being said, I think there are some documents which state you only pay back the accounts subject to vesting. that doesn't necessarily mean the documents are 'correct', we all know sometimes you end up with things which aren't quite correct and eventually the IRS gets things corrected. so I don't really know.

[masteff]

I suspect part of the interpretation that only employer money need be repaid comes in part from Reg §1.411(a)–7(d)(4)(v) "In the case of a defined contribution plan, the employer-derived accrued benefit required to be restored by this subparagraph shall not be less than the amount in the account balance of the employee, both the amount distributed and the amount forfeited, unadjusted by any subsequent gains or losses. Thus, for example, if an employee received a distribution of $250 when he was 25 percent vested in an account balance of $1,000, upon repayment of $250 the account balance may not be less than $1,000 even if, because of plan losses, the account balance, if not distributed, would have been reduced to $500."

But that shouldn't outweigh the earlier wording about "restored upon repayment to the plan by the employee of the full amount of the distribution". Rather, it merely speaks to just the employer-derived benefit since only the employer-derived benefit could be subject to forfeiture; ie, it says the plan must restore the entire amount forfeited, not a cent less. (And if we go down the track of "well, what's actually considered to be "the distribution" in this section of regs?", we find "distribution of the present value of his nonforfeitable benefit" and we know from the 401(k) regs that deferrals are immediately nonforfeitable so they are included in "the distribution" being discussed by the regs. We also know from 411 that in a DC plan, the accrued benefit is the amount in the participant's account, which included deferrals.)