Plan forfeiture allocated to participants as fee credit

[legort69]

Sponsor wants to allocate the forfeiture balance as a fee credit to participants with balances. The participants receive a forfeiture "credit" proportional to their account balance, and not necessarily with regard to the actual fees they were charged that year or over multiple years.

My questions are below. Any input is appreciated.

1) Does the fee credit have to represent actual fees incurred over time in order to be a valid reimbursement?

2) Is this a legitimate way to expend the forfeiture?

3) Should the forfeiture credit be an annual addition?

[Tom Poje]

in Relius there is an option to allocate forf based on account balance, so, yes at least at one time it is a legitimate basis, though I don't recall seeing it in plan language in recent times. and as I recall you then had to test for nondiscrim. whether you can still do that today I don't know, maybe with special document language.

BUT BUT BUT BUT

you can't simply allocate forfeitures whatever way you want. the document tells you how to allocate forfeitures. I think most documents say forfs can be used to pay plan expenses as an option, but I think that is different than re-allocating to people like you are trying to do. I thought that was done 'outside' the plan

 

[Mike Preston]

If every participant is in their own group and the document says that forfeitures reduce contributions one can calculate forfeitures as per the plan document to determine minimum annual additions and then set the otherwise determined  individual allocation amount such that the net effect of the forfeiture allocation is subsumed by the client's determination of allocation amount.  Yes, it is an annual addition.

[Luke Bailey]

And if you allocate on balances (which are likely to be bigger for folks with higher compensation), you could very likely have a 401(a)(4) violation.

[Mike Preston]

7 hours ago, Luke Bailey said:

And if you allocate on balances (which are likely to be bigger for folks with higher compensation), you could very likely have a 401(a)(4) violation.

Huh?

[Tom Poje]

cuz running an allocation based on account balances is not one of the safe harbor formulas for a dc dc plan.e.g. comp to comp, equal $ to each person, etc.

therefore you have perform nondiscrimination testing to determine if a violation has occurred.

[legort69]

If you re-allocate the forfeiture this year to a participant who termed < 2019, then do you have a 415 violation?

[Tom Poje]

going back to the original question:

can you allocate forfeitures based on account balances

yes, IF (BIG IF) the document permitted it. and as someone pointed out, if people are in their own group this is conceivable. If the doc says allocations are comp to comp then no, you simply can't do that.

but to simply allocate them as a fee credit because that is "what I want to do", well, I haven't seen that language in a document

some documents allow forfeitures to pay plan expenses, but again, I have never heard a suspense account used in the manner you are suggesting. rather it is used to pay the asset house or tpa or something like that.

one cite on the internet has

For example, if certain plan fees are billed quarterly and your plan allows forfeitures to pay plan expenses, check the forfeiture account when you receive each quarterly invoice. Some recordkeepers allow you to specify that quarterly fees will automatically be charged to the forfeiture account first with any remaining balance due charged to either the company or participant accounts.

so, I'd be wary of such a practice, especially if it is not based on anything charged to a participant account (I'm assuming these are individual accounts), but rather based on what someone's total account balance was. but then, that is only my opinion and I could be way off the mark.

[Mike Preston]

6 hours ago, Tom Poje said:

cuz running an allocation based on account balances is not one of the safe harbor formulas for a dc dc plan.e.g. comp to comp, equal $ to each person, etc.

therefore you have perform nondiscrimination testing to determine if a violation has occurred.

But since when has the fact that you have to do a general test stood for the proposition that one is very likely to fail said test? 

[Luke Bailey]

Of course, if you do a general test and the targeted allocation passes, you'd be OK. But at that point whether you do it based on balances or just because you like the person doesn't matter. Doing it based on balances is going to introduce an element of randomness.