Using forfeitures to pay earnings

[30Rock]

Do you think forfeitures (which under the plan can be used to pay plan expenses and reduce future employer contributions) can be used to pay earnings under 2 scenarios - 1. late deferral deposits, 2. missed contributions - i.e. missed match. Can I use forfeitures to fund these earnings?

Thanks!

[My 2 cents]

Not a defined contribution plan practitioner, but it seems to me that participants are entitled to both the late or missed contributions (in each case with earnings of some sort) AND a share of forfeitures.

What would the DOL think of the suggested practice?

[30Rock]

Any other ideas about using forfeiture account to pay earnings on late or missed contributions?

[WCC]

Here is a link to a prior discussion that may help. Also see the link svatty provided.

http://benefitslink.com/boards/index.php?/topic/29422-forfeiture-acct-use-to-pay-lost-earnings/

[ESOP Guy]

Money is fungible. If your plan allows forfitures to be used to pay expenses and the employer has historically not done so do it now. Whatever amount of earnings they need to fund they do so. They use the forfitues to pay an equal amount of expenses. You have solved the problem and followed the letter of the law.

You may not have that fact set but I thought I would throw it out there.

[jpod]

Seems to me that using forfeitures to pay earnings on late 401k deposits must be a pt, as it is a use of plan assets to defray the employer's obligation to the plan.

[BG5150]

Forfeitures can be used to offset an ERs obligation to a DB plan. What's the difference?

[jpod]

I disagree on many levels with your premise that forfs are/can be used to reduce an employer's contribution obligation to a db plan, but in any event the analogy doesn't fit.

[Kevin C]

I agree with jpod that forfeitures should not be used to correct undeposited deferrals.

1. Use of forfeitures as deferrals would violate the prohibition of prefunding deferrals in 1.401(k)-1(a)(3)(iii)©. That prior discussion was from 2005, which is before this rule was added with the 2006 final 401(k) regulations.

2. Amounts withheld from paychecks become plan assets as soon as they can reasonably be segretated from the assets of the employer. §2510.3-102 The employer holding plan assets after that is a PT. I don't see how that PT is corrected by using existing plan assets to make the affected participant(s) whole. The PT correction is supposed to make the Plan whole and using forfeitures definitely does not do that. The lost income is also part of the PT correction, so I don't see how existing plan assets can be used to cover that either.

The missed employer contributions are a different story because that is an operational failure, not a PT. Rev. Proc. 2013-12 addresses the use of forfeitures for corrections of operational failures.

[401K_AZ]

You absolutely CANNOT use forfeitures to pay earnings/interest on late deferrals. Late deferrals are technically a PT (an impermissible loan to a party-in-interest from the time the assets could have been reasonably segregated until the date of remittal, or in plain English: The employer is deemed to have borrowed the money until the contributions are sent to the plan’s trust), and they are clearly a breach of fiduciary duty.

You can never use plan assets to correct a fiduciary duty. I am a former DOL/EBSA investigator, and I can assure you that using forfeitures in this manner will get you dinged during an investigation. The Fiduciary is required to make the plan whole (to be read as the earnings/interests must come from outside of the plan). Corrections of Fiduciary breaches are not Plan Expenses!

[austin3515]

401kAZ, I've often wondered why the DOL chose the "Investigator/Investigation" terminology as opposed to "auditor/audit" which employers are much more comfortable with. After all, investigations tend to take place after some suspected wrongdoing (at least that's how it works on Law and Order ) . I understand that approach for those employers/fiduciaries who have abused their role as fiduciaries (e.g., not sending in 401k for a prolonged period), but why not "open an investigation" after wrongdoing is uncovered during an audit?

I think at the end of the day the DOL "investigations" are very comparable to an IRS audit, and my experiences with the DOL auditors has been very agreeable, so from my perspective it is an "investigation" in name only - functionally it is really an audit. But it does certainly start off as more of a confrontation. I've had clients ask me if they need an attorney to represent them, which of course they do not (assuming normal circumstances).

I'd be curious to hear your perspective.

[401K_AZ]

I can't speak to how every regional office operates, but out on the west coast the EBSA mainly hired "Investigators", although there was at least one "Auditor" in the office. The biggest difference that I could tell is that the Investigators had legal backgrounds, and the auditors had an accounting background. There really wasn't much of a distinction in duties as far as I could tell. The DOL or a Regional Director may have a specific distinction that I didn't know about.

As for as “Investigations” vs “Audits”-- at least for the cases I worked on, we only opened cases on plan sponsors where there was suspected wrongdoing--meaning, we didn't audit to just to check up on a plan--we were looking for evidence to substantiate a suspected violation of federal law. So every investigation started out involving “those employers/fiduciaries who have abused their role as fiduciaries”, or there was high likelihood of harm to participants. Many times, the reason for the investigation wouldn’t amount to much, but we had a list of things that we always checked on every plan. So, maybe the default list of things we checked every time may fall more along the lines of an “audit". Also, in any investigation the facts may warrant a parallel criminal investigation to be opened. I don’t think anybody does criminal audits.

[austin3515]

Interesting to hear you say that, as we have often theorized that almost all DOL "whatever you call thems" originated with a participant complaint. In my opinion though, it just seems like it would make more sense to walk in the door as their "friend" and then only "attack" after you've proven they're a crook. I know depositing 401k timely is a big deal, but I don't think depositing 401k haphazardly (i.e., once every month and a half) throughout the year warrants a federal "investigation" (certainly not based solely on the phone call of a disgruntled employee). Interest, penalties, etc., etc., all fair game, but all of that could result from an "audit."

Now let me beat you to your response - I'm not defending the person who deposits 401k once every month and half, it's wrong. It's just a matter of degree, assuming we all agree that "pulling a Madoff" on plan assets would be 12 on a scale of 10. With that as the benchmark I rather think my scenario is a 2 or a 3 at the most.

That's just my 2 cents

[LMOC]

A little different scenario for forfeitures. Can forfeitures be used to to cover negative contributions from a distributiuon match overpayment to a participant?

[benefitz]

Can forfeitures be used to fund the earnings adjustment when the incorrect vesting schedule is applied to a participant and the forfeitures + earnings need to be restored to that participant? Or must the employer make a contribution to the plan to pay for the earnings adjustment?

[jpod]

Here I think you can use forfeitures for the purposes stated because the amount owing to the participant is a plan obligation, not an employer obligation.