Forfeitures Used to Reduce Instead of Allocated With Contributions

[chris]

Employer has maintained a PSP for many years. Appears that prior TPA had misread plan document and used forfeitures to reduce the employer contribution instead of allocating forfeitures together with the employer contribution. Thus, employer has underfunded PSP each year. I have not scoured EPCRS, but it would seem the following in a nutshell would need to happen:

1. Calculate contribution missed for each year plus interest;

2. Allocate missed contribution for each year to participants in Plan in that year;

3. Track down all terminated participants due a contribution and provide them with the $$$....

All years for which contribution miscalculated would need to be addressed.

Am about to jump into EPCRS Rev Proc.... Thanks in advance for any additional guidance....

[PensionPro]

What is the plan's contribution and allocation formula?

[jpod]

Usually it doesn't make any difference in a profit sharing plan with a discretionary employer contribution, so I'm not sure I know what went wrong. Are you saying that the employer resolved to contribute $x to the plan in a year, but what it meant was $x minus forfeitures, and only contributed $x minus forfeitures?

[chris]

The plan is a cross-tested plan with various groups/classes of participants. Presumably, testing was done each year to determine the appropriate funding for each of the groups/classes. The allocations section of the plan document provides that forfeitures are "to be added to any employer contributions for the plan year and apportioned to each group in proportion to the nonelective contribution made for each group, as made or determined by by the employer." Seems to me that TPA would provide the employer with the bottom line number of what employer would need to contribute to satisfy the gateway contribution requirement and then employer would make a determination as to how much additional each group/class of participants was to receive within testing limits. At that point, TPA presumably told employer that forfeitures can be used to reduce the contribution Employer just decided to make and Employer then kicked in only the difference. Looks to me that example of the issue is that employer decided to contribute $100 in plan year x, but only put $90 in the PSP because TPA advised that the $10 of forfeitures in plan year x could be used to reduce employer's contribution. Plan document provides that forfeitures are to be allocated along with employer contributions (not used to reduce employer contributions). I understand that a PSP is discretionary, but looks like there would be a problem. Otherwise, what's the point of having the choice of forfeitures either: 1) reducing employer contributions; or 2) being added to employer contributions within a PSP? Maybe I am making more out of this than there is..... Thanks for any help....

[PensionPro]

"Looks to me that example of the issue is that employer decided to contribute $100 in plan year x, but only put $90 in the PSP"

How about looking at it this way: the employer contributed $90 and $10 of forf was added to the contribution? Unless the document has rigid language regarding the contribution formula you do not have an operational failure. So the question is: does the document say that certain groups/classes will receive a specific percentage of their compensation? If the document says for example that secretaries will receive 5% of their compensation and forfeitures will be added to this contribution then you may have a failure under the scenario you describe. Otherwise not.

[chris]

I understand what you are saying. Document does not have set percentages hard-wired for each group/class. But somewhere in the process Employer would have communicated to Trustee that it would fund a certain dollar amount/certain percentage of compensation to each of the classes of participants. Would seem that at that moment the amount of the contribution to be allocated would have been decided and then need to be correctly allocated. From the total plan perspective, Employer has a formal resolution for each year that states that Employer has directed the appropriate Officers of the Employer to make a total contribution of $x to the PSP for the plan year ending December 31, 20XX. I guess it is a matter of whether that number in the resolution is gross or net of forfeitures? So, if it ends up it is the gross number (e.g., $100) and forfeitures are $10 and employer wrote a check to the PSP for $90, then it would still seem there is a problem. From the participant angle, argument would be that the employer contribution was to be $100 and employer incorrectly used forfeitures ($10) to offset and only kicked in $90 and is $10 short in it's contribution. If the number in the resolution is the "net" number, then no problem? Again, maybe I am making more out of it than need be.... Thanks for your help on this....

[PensionPro]

Clearly, the employer intended to fund the net number because they issued the check for the net amount. If I were in your position, I would clarify/modify the resolution to show the net number and not bother with EPCRS.

[chris]

Unfortunately, not that simple as plan has been audited by CPA for a number of years and it currently has in excess of 150 participants. Guess only hope for easy fix is that the resolutions show the "net" number and the overall numbers are such that minimum gateway is satisfied in all events.... If CPA auditing has not caught it, then low likelihood any issue would develop....

[PensionPro]

I don't see how a CPA audit of the plan has any bearing on the situation, esp. since they have not brought up this issue. So the contribution and the corporate resolution do not line up. I would not treat that as a plan issue. As long as all the other rules pertaining to non-discrimination, deductions, etc. are followed.

Ultimately it is your decision whether you end up correcting under EPCRS but I wouldn't.

[chris]

What I meant was that there are already corporate resolutions in place reflecting a contribution amount in each year and those resolutions have been reviewed and relied upon by third parties, e.g., CPA handling plan audit, etc. Thus, would be awkward to have two different resolutions floating around and would seem to call attention to the issue. May be best to make sure employer is clear going forward as to contribution amount and how to correctly describe/determine it. Would have to rely on argument discussed above as to contribution being discretionary and employer's intent to make the "net" contribution if issue were to arise..... Thanks for your help...

[ESOP Guy]

Otherwise, what's the point of having the choice of forfeitures either: 1) reducing employer contributions; or 2) being added to employer contributions within a PSP? Maybe I am making more out of this than there is..... Thanks for any help....

I would say there is no point to having those choice 99.99% of the time in a PSP for the reasons you outlined.