Forfeitures for Plan Expenses

[austin3515]

403b prototype document from Corbel, use of forfeitures question:

"Plan Expenses. Pay reasonable Plan expenses first (See Section 7.04©), then allocate in the manner described above."

If this option is selected for match and nonelective, then must forfeitures be used first to pay recordkeeping expenses? In the plan in question, the recordkeeping expenses are paid by selling shares in mutual funds (i.e., not by plan sponsor and not by revenue sharing).

[Belgarath]

It does seem that this document is less flexible than their standard 401(a) document in the language produced.

That said...given that these are not "prototypes" and therefore I think a trifle more latitude on interpretation and operation might be allowed, I wouldn't hesitate to allow a plan sponsor to pay administrative fees if they so choose. I really find it hard to picture an auditor saying that you must go back and reduce the accounts of participants because a plan sponsor chose to pay expenses. You may want to bring this up to Sungard - they are pretty good about modifying language based upon reasonable feedback.

[austin3515]

But i could see an auditor saying you should have used forfeitures pay the rk expenses. Right?

[david rigby]

Does the language refer to plan expenses, "... to the extent not paid by the plan sponsor..."?

[austin3515]

It Does but rk fees are paid by the plan. Ie, because sponsor didn't pay them should they come from the forfeiture account?

[Belgarath]

Austin - I guess I misunderstood the thrust of your initial question.

Yes, I agree - IF recordkeeping expenses are paid BY THE PLAN, then I think they must first come from forfeitures. I thought you were asking if forfeitures must first be used if the plan sponsor was going to pay, rather than using plan assets.

[austin3515]

I submitted this to Corbel, and they responded that you could suggest that only unpaid expenses must come from forfeitures. Perhaps it was a convenient interpretaion (which I am going with due to necessity) because I think you would agree that this is just not done pretty much across the board. As I have said to others, I have NEVER seen a record-keeping platform set up to deplete forfeitures first before running their normal expense charging process (i.e., prorata allocation of the expense, selling funds to raise cash, etc).

If anyone has a different take on what takes place in the "real world" please let me know.

[GMK]

IMHO, your OP is about the use of forfeitures, and it requires that if there are unpaid plan expenses, forfeitures must be used to pay those plan expenses first, before you can allocate any forfeiture amount to participants' accounts.

[austin3515]

Now that I like...

[Bill Presson]

As with the others, I think you probably have some flexibility. But I wouldn't want to explain why I charged an RK fee to the participants and then reallocated forfeitures. It might not make any difference, but if the RK fee is allocated differently than the forfeitures, you would have some people paying more than they should have.

If the fees are paid by the sponsor, then the whole question is irrelevant.

[BG5150]

IMHO, your OP is about the use of forfeitures, and it requires that if there are unpaid plan expenses, forfeitures must be used to pay those plan expenses first, before you can allocate any forfeiture amount to participants' accounts.

So, the sponsor can't pay the fees? It has to come out of forfs?

[austin3515]

The sponsor can pay them, because the forfeitures are used to pay expenses paid by the Plan.

Bill, are you of the opinion that plans are set up to pull RK charges from forfeitures before pulling from participant accounts. I have honestly just never seen that done, but most plan documents check the "use forfeitures for plan expenses" box.

[Bill Presson]

The sponsor can pay them, because the forfeitures are used to pay expenses paid by the Plan.

Bill, are you of the opinion that plans are set up to pull RK charges from forfeitures before pulling from participant accounts. I have honestly just never seen that done, but most plan documents check the "use forfeitures for plan expenses" box.

Most of the plans we handle are daily and we do the recordkeeping in house. So, our standard procedure is for the processor to determine if forfeitures are available and verify that forefeitures can be used for fees.

[austin3515]

Wouldn't most if your clients prefer to use them to reduce their out of pocket expenses like a match?

How about those with clients at John Hancock? I don't think JH will go into the forfeiture account first for their charge.

[GMK]

IMHO, your OP is about the use of forfeitures, and it requires that if there are unpaid plan expenses, forfeitures must be used to pay those plan expenses first, before you can allocate any forfeiture amount to participants' accounts.

So, the sponsor can't pay the fees? It has to come out of forfs?

Didn't say that. If there are unpaid expenses, it's because the sponsor didn't pay them. In that case you can't allocate forfeitures until you've first used them to pay unpaid fees. If the sponsor paid the fees, there wouldn't be any unpaid, and then you could allocate forfeitures without using forfs for fees.

[BG5150]

Didn't say that. If there are unpaid expenses, it's because the sponsor didn't pay them. In that case you can't allocate forfeitures until you've first used them to pay unpaid fees. If the sponsor paid the fees, there wouldn't be any unpaid, and then you could allocate forfeitures without using forfs for fees.

Plan has $20,000 in forfeitures and the plan calls for them to be reallocated or used for fees (not allowed to offset ER contrib). I do my work for the year, send them a letter saying this is how you reallocate the $20k. I also include my invoice for, say $2,500 (made-up number).

Should I have only sent a schedule that reallocated $17,500?

[austin3515]

The question is, as fees were incurred during the year, should they have been paid from the forfeiture account. I just found a very relevant section in the Basic Plan Doicument Section 7.04©(2).

(2) Allocation of Plan expense.

As to any and all nonsettlor reasonable Plan expenses, including Vendor fees, which the Employer determines that the Plan will pay, the Plan Administrator has discretion: (i) to determine the method of allocating reasonable Plan expenses that are charged to the Plan as a whole; (ii) to determine which reasonable Plan expenses the Plan will charge to an individual Participant's Account; and (iii) to adopt an expense policy regarding the foregoing. The Plan Administrator must exercise its discretion under this Section 7.04©(2) in a reasonable, uniform and nondiscriminatory manner. The Plan Administrator will direct the Vendor to pay from the Funding Vehicle or to charge to the overall Plan or to particular Participant Accounts the expenses under this Section 7.04©(2) in accordance with the Plan Administrator's election of expense charging method or policy.