Forfeitures sitting around...

[doombuggy]

I have a plan I took over that has over $7200 in forfeitures that needs to be used as an allocation/spread to the plan. the last year this profit sharing plan made an allocation was 2008. the principal owner is basically retired and his current Sch c gross is less than his expenses. His 2 sons terminated 12/31/2008 and operate as sole props. Owner pays the 2 employees of the office.

the bulk of these forfs occurred in 2006 plan year with more being added in 2008. the account has gained since 2006. How do you think we should allocate the forfs? This is a bit ugly....thanks for your thoughts

[masteff]

What about amending the plan and using them up to pay plan expenses (ie your fees)?

We did that to a frozen plan that had accumulated forfeitures over the 8 or so years between freezing and amendment.

[doombuggy]

Apparently, once any forfs are used to reinstate an account:

any remaining Forfeitures may be used to satisfy any contribution that may be required pursuant to Section 3.8 or 6.10, or be used to pay any administrative expenses of the Plan

Our fees aren't going to amount to $7200, even if they do terminate this plan, which is highly likely. Our thoughts were to allocate the forfs to those that would have gotten them in say 2007 (the year after the initial deposit) or 2009 (the year after the 2nd deposit, much smaller amount). or maybe both?

[masteff]

the principal owner is basically retired and his current Sch c gross is less than his expenses.

Owner pays the 2 employees of the office.

Has the owner considered making a current contribution for the 2 employees under plan section 3.8 or 6.10 (assuming either of those sections is useful to us right now) even though he can't make one for himself? ("profit sharing" is a misnomer since generally can make a contribution to employees even if the business has a net loss.)

If you excluded the owner and sons, using '07 or '09, would you have a different result than the 2 current employees? And does any other person who'd get an allocation under that assumption still have an account balance in the plan or would you have the problem of distributing minor balances to previously cashed out participants?

You could make a slightly conservative estimate of your fees. The owner could then use the forfs to make a contribution to the two employees and later pay the bulk of your fees (with any remainder of your fee being paid outside the plan). It would use up the forfeitures w/out discriminating and would minimize his out of pocket expense on a business that is currenly losing money.

[doombuggy]

Well, the two employees who are currently eligible (one on 7/1/13 and the other on 1/1/14) are new and the owner was not interested in giving them an allocation (according to his cousin the broker).

In 2007, the plan consisted of the owner, his 2 sons, his sister and another employee. In 2009, the plan had the same make up. The other employee & was paid in 2010, the sister was terminated and paid in 2011.

currently, only the owner and the sons have assets in the plan. There would not be a problem paying out anyone (such as the former ee and the sister) from the pooled account, even if the balance was small.

I don't think they want to give these forfs to these two new employees. My thought on looking back to 2007 and 2009 to correct is because that is when the forfs should have been used - the bulk to 2007, when there wasn't an allocation at all and then the smaller allocation in 2009, again when there was no allocation (but there was for 2008, go figure). I think they would be happier if we went back and "self - corrected" by allocating it for those 2 years, as it should have been done. I just have never done something like that before (cause I always get rid of forfs after that year is up!) and wasn't ever sure if it COULD be done that way?

[doombuggy]

Sorry, I can't seem to edit my post. The other employee terminated in 2010 and was paid out. I forgot to type "terminated" int he sentence...

[Lori H]

Would the 2 new employees even be fully vested in the forfeiture amounts?

[doombuggy]

No, the plan has a 6 year graded schedule. Of course, if they terminated the plan, the vesting would excelerate to 100%.

I guess the only other option for the money is to return to the plan sponsor and they would have to pay the 50% excise tax, but I really don't want to go that route.

[BG5150]

Why would you think it would be okay (excise tax notwithstanding) to return the money to the plan sponsor? They are legitimate forfeitures, no? Not mistakes of fact?

Also, I do not think you can self-correct back to 2009--that would have to have been done by the end of '12. Also, I would consider this a significant failure, as there is a pattern of failure, and it could quite possible affect 100% of the participants.

[doombuggy]

I am trying to figure out what to do with this plan's forfeitures that should have been used long ago, long before I came to work here and took over this plan. the broker/cousin has indicated that the client would not be happy to reward such a large sum of money to two employees who are new. I am trying to find some other avenues to spread these forfs as they should have been done in the past. I guess I will have to bring this up at next week's Sungard conference.

[BG5150]

Charge him $7,000 for your time figuring this out. This way, you only have to spread around $200.

What is the allocation formula?

[doombuggy]

Thanks for the laugh....I could use it when I still have about $2200 in vet bills from my diabetic cat and now am facing a $2500 deductible for my 3 day sudden hospital stay right after Christmas.

The allocation is comp to comp, and if owner has comp that is less than his expenses, then it's $0 for him and $7200 spread to two newbies. Not really fair given the circumstances. Now that was as of 12/31/13. I don't know if we terminated the plan in 2014 if he has comp greater than expenses, the answer would change, but these two newbies would still get money. and the owner is still stuck taking out his RMD. I guess the only other solution is to keep the plan going until the forfs are all used up in fees. gotta run, IRS phone forum...

[BG5150]

In strict terms you have an operational failure. You (the proverbial "you") never allocated the forfeitures. It's probably too late to use them for past expenses (there are threads discussing how far back you may or may not be able to go to use forfs for fees).

A primary tenet of EPCRS is to put the plan in a situation it would have been had the error hadn't occurred.

Also, if you were reviewing this plan, how would you look at the circumstances that forfeitures were not allocated when the lion's share (if not all) of the amount was to be given to NHCEs, but rather when, now, the bulk of the proceeds (if not all) are going to the owners? It could seem like the non-allocation was done purposely to the advantage of the owners.

And again, I don't think you can self-correct this; it doesn't seem to be insignificant.

[masteff]

then it's $0 for him and $7200 spread to two newbies.

Not that I'm advocating a particular solution but I will point out that it doesn't have to be $7200 to them. It could be $7200 reduced by a reasonable estimate of any and all upcoming plan expenses that can also be paid from forfeitures.

[doombuggy]

In strict terms you have an operational failure. You (the proverbial "you") never allocated the forfeitures. It's probably too late to use them for past expenses (there are threads discussing how far back you may or may not be able to go to use forfs for fees).

A primary tenet of EPCRS is to put the plan in a situation it would have been had the error hadn't occurred.

Also, if you were reviewing this plan, how would you look at the circumstances that forfeitures were not allocated when the lion's share (if not all) of the amount was to be given to NHCEs, but rather when, now, the bulk of the proceeds (if not all) are going to the owners? It could seem like the non-allocation was done purposely to the advantage of the owners.

And again, I don't think you can self-correct this; it doesn't seem to be insignificant.

If they were allocated in 2007 and again in 2009 (in theory, as that is what I would have done), of the 5 participants who would have gotten an allocation, 1 was an owner, 2 were owner's sons/hces, and the other two were NHCEs (sister of owner and another employee). Allocation now would be either 2 newly elig NHCEs and possibly owner.

Will research further, but I can't see how we can increase our fee to research an error like this. My frustration is showing because I have found lots of errors that I have had to clean up in the last year....thanks for listening and adding your 2 cents!