Can forfeited shares or forfeited cash be returned to the company and

[John A]

An ESOP plan document specifies that the forfeitures are reallocated. Can the document be amended so that the forfeitures go back to the company? The company would then put the forfeitures back into the plan as a contribution and receive a tax deduction for it.

We do not think that this is allowed, but we have a client insisting that a lot of ESOP plans do this. The plan has some cash, and has a leveraged loan that they are making payments on. The plan is not entirely owned by the ESOP, if this makes any difference. 1). Can forfeited shares or forfeited cash go back to the company? 2). If yes, could the company put the forfeitures back into the plan and receive a deduction for it? Is there any guidance such as a regulation that states that this can or can't be done?

If you agree that this is not allowed, are there other alternatives for the forfeitures besides reallocating them that would be to the advantage of the company?

[RLL]

The forfeitures may not go back to the company, as this would constitute an improper reversion of plan assets to the employer (although there may be a minor exception to this rule for certain forfeitures under some terminating plans).

The forfeitures may be applied to reduce the amount of employer contributions to the ESOP; for example, the forfeitures may reduce the amount of a contribution required under a formula, such as a % of compensation or a % of profits, etc. The company's tax deduction, however, would be limited to the net amount contributed.

The forfeited amounts may not be applied to payments on the ESOP loan.

[This message has been edited by RLL (edited 03-29-2000).]

[BenefitsRUs21]

Why can't forfeited amounts be applied to payments on the ESOP loan?

[Lou S.]

They are trying to get a deduction twice for the same money. And no that's not allowed as far as I know.

[RLL]

Under the ESOP loan regulations and IRS guidelines, only contributions (made for loan repayment purposes), dividends on the shares that were acquired with the loan proceeds, and cash proceeds from the sale of suspense account shares (in certain limited situations) may be applied as payments on an ESOP loan.