HCE's want to opt out of forfeiture reallocation

[R. Butler]

Plan document provides that forfeitures are added to the employer profit sharing contribution. Plan sponsor decided not to make a profit shairng contribution so they profit sharing allocation is the forfeiture. The HCE's ( the 2 owners are the only HCE's) want to opt out of that allocation and just have everything reallocated to the other employees, Technincally it doesn't follow the document, but I guess I just don't see a consequence. Would an IRS or DOL auditor really come in and force corrective action that results in the two owners getting additional allocations? I don't see that happening.

Any thoughts are appreciated.

[masteff]

IMO, the real question is whether the cow is already out of the barn. Is a forfeiture allocation considered an accrued benefit (or some such other technical term) such that the current one can't be cutback?

What if they declare a profit share, only for NHCEs, equal to the HCEs forf alloc? The HCEs still get the forf alloc but it'd give the others the desired outcome.

[Belgarath]

I'd be careful on this. First, as already noted, you aren't following the terms of the document. IRS/DOL penalties? Maybe - one can never tell.

However, there are other items that may have to be considered. Just as an example, suppose that by not being considered "active participants" by virtue of not receiving an allocation of forfeitures, the owners who might otherwise be ineligible for a deductible IRA contribute full amount to IRA's and deduct them. IRS audits, and says they should have received an allocation in the plan, hence were "active participants" and therefore based upon income they were ineligible for a deductible IRA contribution. IRA deduction denied, taxes and penalties imposed.

Far-fetched? Very likely, but it's hard to get in trouble by just doing it correctly. I would not advocate ignoring the allocation provisions in the document. I'd just say sorry, nice idea, but you can't do it.

[Bird]

I would not advocate ignoring the allocation provisions in the document. I'd just say sorry, nice idea, but you can't do it.

I agree. It's not at all about what feels or sounds good. It's what the document says to do.

[R. Butler]

It has a 401(k) component to which both owners contributed so I'm not concerned with the IRA issue.

They had some large expenditures this year and a profit sharing contribution was not made for the first time in a while. They were hoping to show the employees some appreciation by forgoing their allocation & just having it split among the rank and file.

We will probably ultimately just recommend, as you suggest, that they follow the terms of the plan. It is just the better policy. We were researching further to cover all our bases and really hoping that we would find something that says they'd be okay.

Thank you for your thoughts.

[BG5150]

For 2012, the ship has sailed, I think.

is it a new comp plan by any chance?

However, you might be able to amend the plan in 2013 to do what you want it to do.