Bloated Forfeiture Account

[BERPA]

Plan sponsor (with high employee turnover) eliminated 401(k) plan's fixed matching contribution effective 1.15.2018 and, after payment of expenses, has over $6,000 in forfeiture account. Document provides that match forfeitures be used to reduce match for the plan year in which they occur and to pay expenses.  Sponsor will continue to pay expenses from the account, but it may take a few years.   

Does anyone think there would be an issue?  It's not like the account accumulated over a period of several years and we're following the terms of the plan.  Not sure what else we can do.  

[ratherbereading]

 A plan that does not annually allocate forfeiture amounts may jeopardize its qualified plan status. Can you allocate it to eligible participants?

[BERPA]

We thought about adding a discretionary match and amending the forfeiture provision to leave use of at the discretion of the employer, effective 1.01.2019.  We also thought about using it as a disc ER contribution (integrated at TWB), but don't think it would help because of the turnover. 

[Luke Bailey]

2 hours ago, CEB50 said:

 A plan that does not annually allocate forfeiture amounts may jeopardize its qualified plan status. Can you allocate it to eligible participants?

CEB50, that may be correct, but can you provide a citation to a reg or other guidance?

[Lou S.]

Luke this is the closest I could find to "official IRS guidance"

https://www.irs.gov/pub/irs-pdf/p4278.pdf
 

Quote

 

Fixing Common Plan Mistakes: Improper Forfeiture Suspense Accounts Each issue of the RNE examines a common error that occurs in retirement plans and provides information on fixing the problem and reducing the probability of its recurrence. The Issue Many defined contribution plans require participants to complete a period of service before becoming fully vested in matching or nonelective employer contributions. If a participant leaves a company before completing the service required for full vesting, his or her non-vested account may be forfeited. Some plan administrators place these forfeited amounts into a plan suspense account, allowing them to accumulate over several years. The Internal Revenue Code does not allow this practice. Find the Mistake Forfeitures must be used or allocated in the plan year incurred. The Code does not authorize forfeiture suspense accounts to hold unallocated monies beyond the plan year in which they arise. Revenue Ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participants’ accounts in accordance with a definite formula defined in the plan. This would preclude a plan from carrying over plan forfeitures to subsequent plan years, as doing so would defy the rule requiring all monies in a defined contribution plan to be allocated annually to plan participants. Revenue Ruling 84-156 states that forfeitures may be used to pay for a plan’s administrative expenses and/ or to reduce employer contributions. Treasury Regulations §1.401-7(a) notes that forfeitures must be used as soon as possible to reduce employer contributions. The plan document’s terms should have provisions detailing how and when a plan will exhaust plan forfeitures. A plan’s failure to use forfeitures in a timely manner denies plan participants additional benefits or reduced plan expenses.

5 Spring 2010Retirement News for Employers Common causes for this error include: • The plan’s sponsor and/or third party administrator fails to monitor the plan’s forfeiture account to ensure that forfeitures generated in that plan year are used according to the plan’s terms. • The plan sponsor erroneously thinks that he or she has discretion over how and when forfeiture monies in the suspense account can be applied. • Plan document terms are vague in describing how forfeitures are to be handled and results in the plan’s document and operation being inconsistent with the holdings in Revenue Rulings 80-155, 84-156 and the Code. Fix the Mistake Generally, this failure can be corrected by reallocating all forfeitures in the plan’s forfeiture suspense account to all plan participants who should have received them had the forfeitures been allocated on time. The plan sponsor should revise prior plan year allocation reports to reflect the forfeiture allocation and pay any amounts due to terminated participants. Depending on the plan terms or the facts and circumstances of a particular situation, it may be appropriate to take the non-current-year forfeitures and use them as employer contributions for the current plan year. Plan sponsors should apply the correction principles in Revenue Procedure 2008-50, section 6 when making correction. Plan sponsors can correct this mistake using the Employee Plans Compliance Resolution System (EPCRS). Using the Self-Correction Program, the mistake must generally be fixed within two years following the close of the plan year in which it occurred. Unless the failure can be classified as insignificant, the Voluntary Correction Program must be used after this time. VCP must also be used if the plan document terms are defective and need to be corrected retroactively by a plan amendment. Avoid the Mistake Plan sponsors and third party administrators need to monitor plan forfeitures. If a suspense account is used, then they must ensure that all forfeitures for a plan year are promptly used according to the plan’s terms. • No forfeitures in a suspense account should remain unallocated beyond the end of the plan year in which they occurred. • No forfeiture should be carried into a subsequent plan year. • For those plans that use forfeitures to reduce plan expenses or employer contributions, there should be plan language and administrative procedures to ensure that current year forfeitures will be used up promptly in the year in which they occurred or in appropriate situations no later than the immediately succeeding plan year.

 

 

[justanotheradmin]

2 hours ago, BERPA said:

We thought about adding a discretionary match and amending the forfeiture provision to leave use of at the discretion of the employer, effective 1.01.2019.  We also thought about using it as a disc ER contribution (integrated at TWB), but don't think it would help because of the turnover. 

Why does the turnover affect it? There is no one eligible for it? If a participant receives an allocation, but then quits a short time later, and not vested, so the money is forfeited, you have a new forfeiture, and a new year. It's not the old money again. Sounds like you will have newly forfeited money each year to allocate, for quite a few years, until everyone is either 100% vested, or paid out / forfeited. 

That scenario is pretty common in small plans that discontinue regular employer contributions. The forfeiture money usually takes 6 years of being allocated and forfeited each year to be used up. 

[BERPA]

Thank you all for your input. I'll suggest allocating as a disc ER contribution and make them aware of the "recycling".

 

[JackS]

Check your document as to how much time you have to allocate it but I would recommend they allocate it as a match per the current terms AND amend the doc so that in the future they could use it for any legal purpose.  Allocating it as a NE could potentially create a lot of very small accounts.  By allocating it as a match, you are giving it to participants who already have accounts.   

[msmith]

With the high turnover, was there a partial Plan termination issue? If so, some of those forfeitures should transfer back to the impacted participants, as they might be fully vested.

[Luke Bailey]

23 hours ago, Lou S. said:

Luke this is the closest I could find to "official IRS guidance"

https://www.irs.gov/pub/irs-pdf/p4278.pdf
 

 

Lou S., I had heard this rule stated many times in the past, and I appreciate your providing the informal guidance from IRS. I can see where from IRS's standpoint they would see it as a problem for an employer to carry forward a suspense account indefinitely, benefitting from tax deferral, without allocating it to participatants or using it up to pay plan expenses. Could also be used to benefit "last standing" participants if plan is eventually terminated. At least they give you until the end of the next year to use it for administrative expenses.

[BG5150]

I can probably come up with billable hours totaling $6,000.  Send them my way.  ;)

[rr_sphr]

we got slapped on the hand by the IRS during audit from 2015's plan year (audit done in 2019) -- luckily we did use most up by 2018 but the IRS was "unhappy" that they were held so long and that they should have been used or reallocated much sooner.