Application/Allocation of Forfeitures in Cross-Tested Plan

[lkpittman]

We are setting up our PS plans to use discretionary amounts contributed for each class, allocated salary proportionate (with required notice to trustee for discretionary amounts). How are forfeitures to be "allocated"? If they are used to "reduce" the contributions, how is that actually applied (to each group?) or worded in the document? Any help here would be appreciated.

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LKP

[Larry M]

Seems to me you can do it any way you wish, including:

Forfeitures can be added to contributions by class;

forfeitures can be allocated, in additon to the employer contribution under a different class formula *VERY complex - but good income for tpa ;

forfeitures can be allocated among all particpants in proportion to their salaries;

[lkpittman]

Okay, but if we're "backing into" the amount for the non-key classes (i.e., determining the minimum amount that can be allocated under the cross-testing while allocating max to other class) then I cannot allocate the forfeitures "in addition to" the amounts going to each class--that will throw off the testing. I want to reduce contributions by forfeitures. Do I need any special language that reduces each class by a certain amount of the available forfeitures, or can I simply leave mention of the forfeitures out of the allocation language and indicate elsewhere simply that forfeitures are used to reduce the er contribution? Is this making sense?

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LKP

[lkpittman]

Thanks, Larry & Tom, for your input. We are still having some trepidation about how to write the volume plan language with respect to forfeitures, but this helps!

Laureen

[Tom Poje]

I don't think you can leave out how forfeitures will be allocated - they are no longer definitely determinable.

yes, they may reduce contributions, but when you have class allocations, I think you are getting into a touchy area. certainly the IRS has not addressed this yet.

Why not do this:

step 1 forfeitures allocated pro rata to all employees

step 2 contributions made to each class

it would seem to get around any problems.

or, for that matter, why not invoke the old allowable method of forfeitures - based on account balances. you are cross testing anyway, I nearly forgot about that option!

[Dave Baker]

In the couple of plans I've done, I've just said that the employer must designate to the trustee by the due date plus extensions the dollar amount of the employer's contribution for the plan year, and how many of the total of those dollars plus the forfeiture dollars arising for the plan year that is to be earmarked to be earmarked to each of the categories.

The consultant ends up reporting to the employer how many dollars in forfeitures have arisen, then the employer tells the consultant how many dollars it wants to contribute, then the consultant tells the employer how many dollars (out of the total of those two amounts) have to be allocated to the non-keys in order to get the key employee category up to where it wants to be (typically $30,000). The employer writes that down on a paper that it sticks in the trustee's hands, where it is filed away.

[mwyatt]

I concur with Dave Baker. That is the approach that I've taken on the few plans we've done. I think that this is the best approach as your original calculations presumably generate the "optimal" (i.e., the minimum amount necessary to get your principals the maximum amount and satisfy 401(a)(4)) contribution level. From this, subtract your forfeitures to determine the net amount to be physically deposited. The Trustee instructions then state that the Employer will be contributing $X and that forfeitures of $Y will be reallocated under the terms of the Plan. The total amount of $X plus $Y will then be split between your classes. This gets your allocation back to your solution and I don't see how the IRS would object as everything is spelled out in the Trustee instructions.

[lkpittman]

Thanks, everyone, for your input. The language is being finalized as we speak (of course, I've got the attorney to deal with!) . . .