Use of Non-Vested Participant Balances Early

[ERISAGal]

Plan Sponsor chose to forfeit participants' non-vested account balances immediately upon their termination of employment and use that money to reduce their payroll period employer match contribution payments.  The plan document states the typical requirements of forfeitures occurring on the earlier of being fully paid out their vested portion upon termination OR having incurred 5 1-year Breaks-in-Service.  The Adoption Agreement also states that the timing of allocation of forfeitures should occur in the Plan Year following the Plan Year in which the forfeitures occur.  

It appears that the employer should not have had access to the forfeited amounts until the year following the year the "true" forfeiture would have occurred.  How should this problem be corrected?  Everything I'm finding so far discusses employers NOT using forfeitures by Year-End.  This employer seemed to use them too soon.  Is this addressed in EPCRS?

Thanks in advance for your help!

[Luke Bailey]

I don't recall this being specifically addressed in EPCRS. The correction is to recredit the amounts, with earnings, to the accounts from which prematurely forfeited and contribute to the plan the amounts needed to make up for that. In other words, unscramble the omelet back into the original eggs. If done by end of second plan year after the first plan year in which occurred, you are in EPCRS. If first occurred earlier than that, would need to review facts and circumstances (mostly amounts and # of participants), but most likely this is a significant failure and would need to go through VCP. Arguably there is also a DOL PT problem here (use of plan assets by party in interest), but I am not sure that most practitioners would feel the need for VFCP for something like this. Again, would need to review facts and circumstances.

[Lou S.]

Amend the plan to forfeit on termination?

[Luke Bailey]

2 hours ago, Lou S. said:

Amend the plan to forfeit on termination?

Lou S., maybe. Of course, the amendment would also have to require that participant have taken lump sum of vested portion or deemed zero cashout. Would have to apply only to individuals terminating after amendment to avoid cutback, right?

[Lou S.]

50 minutes ago, Luke Bailey said:

Lou S., maybe. Of course, the amendment would also have to require that participant have taken lump sum of vested portion or deemed zero cashout. Would have to apply only to individuals terminating after amendment to avoid cutback, right?

Oh yeah maybe I wasn't clear, sure they would have to be 0% vested, take a distribution of their vested amount or have a 5 year break in service.

Oh now I see maybe I read the OPs original question wrong.