Gain on Forfeitures

[Guest crouch]

How do service providers handle the gain on forfeitures when either reallocating or using the forfeiture to reduce employer contribution? Does most plan documents address this issue, if yes, how do you handle this situation if your document is silent? Is the gain just added to the forfeiture amount and reallocated or reduced according to the plan document? If the gain is added to the forfeiture used to reduce employer contributions, is it acceptable in that the gain may reduce the total amount the employer must contribute? Finally if the gain is not added to the forfeiture, how is it handled in

a daily environment. Any regulation cite would be helpful.

[bzorc]

In my experience, the gain on the forfeiture account was used in conjunction with reducing the employer contribution. Essentially, the account balance at the end of a quarter (the client funded their profit sharing contribution on a quarterly basis)was used each time, which was a mixture of forfeitures and gains (the forf acct was invested in the plans' money market vehicle).

Sorry, I don't have a code cite, but this was agreed upon by the client when they converted from traditional to daily valuations.

Hope this helps.

[Guest]

Most plan documents, along with the adoption agreement, indicate how forfeitures are to be handled. Many are used to reduce future employer contributions, but equally they can be allocated to the remaining employees.

There really is no difference in how forfeitures are handled in a daily plan vs. a traditional balance forward plan. If the plan document indicates that forfeitures can be used to reduce future employer contributions, then indeed the employer only needs to contribute the difference between the calculated contribution amount and the amount of forfeitures on hand.

If forfeitures are allocated to participants, then in a daily plan, on the day the allocation is done, the dollars are deposited to each participant's account and shares are purchased (in the case of mutual fund investments), just as if a contribution had been made to the participant.

Hope this helps.

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Carol J. Ringwald

Senior Vice President

Shawmut Consulting Assoc.

[Guest crouch]

Thanks for the responses!! My major concern is regarding the gain that is earned on the forfeitures. At one point we just added the gain to the amount reallocated or used to reduce, however, over the last several years we have taken the position that forfeiture can't receive gain. Taking this position, has created a problem for us in how to handle the actual gain.

I am hoping that just adding the gain to the forfeiture is an acceptable practice. I would appreciate any additional thoughts on this subject.

[Alf]

I am sure that adding the gain to the forfeiture amount is by far the most common practice. I bet that most employers haven't thought about it, but that this is what they have been doing for ever. I don't know what other choice there is unless the plan document has a specific provision that deals with earnings on the forfeiture account.

[Guest]

I have always added the gain to the forfeiture and allocated based on the plan document. I don't see this as a problem, unless the document specifically excludes the gain being posted to the forfeiture balance.