Forfeitures

[Belgarath]

I'm embarrassed to even be asking this question, but I've managed to twist myself around on a very simple question. Profit sharing plan, forfeitures can pay expenses or be used to reduce employer's contribution. Forfeitures are NOT reallocated.

Participant terminates in 2020, receives full distribution, so forfeiture occurs during 2020, for the 2020 plan year. Can this forfeiture be used to reduce the 2019 plan year profit sharing contribution deposit that is made in 2020?

Looking out at the snow blowing by the window is freezing my brain.

[ratherbereading]

No I don't think you can.  You can use them for 2020. At least that's what the office I work in does. 

[Bird]

That's kind of interesting.  Looking at our (FTW) document language, it says no LATER than the end of the year following the Plan Year in which they occurred.  I think it is implicit that you wouldn't allocate a 2020 forfeiture "in" 2019 (and I wouldn't) but can't find it in black and white.

[Belgarath]

Thank you both. That's what I was coming up with as well, and yet I felt foolish because I wasn't finding the "black and white" either.

[Larry Starr]

5 hours ago, Belgarath said:

I'm embarrassed to even be asking this question, but I've managed to twist myself around on a very simple question. Profit sharing plan, forfeitures can pay expenses or be used to reduce employer's contribution. Forfeitures are NOT reallocated.

Participant terminates in 2020, receives full distribution, so forfeiture occurs during 2020, for the 2020 plan year. Can this forfeiture be used to reduce the 2019 plan year profit sharing contribution deposit that is made in 2020?

Looking out at the snow blowing by the window is freezing my brain.

No is the answer to your question; you are using language that says "add it to the employer contribution" and allocate, but the forfeiture (in your case) is not available until 2020 so it can't be used for 2019.  If the participant terminated in 2019, no problem using it.

We always have forfeitures treated as an employer contribution (added to employer contribution and allocated); no other option. The result of that is the EMPLOYER actually gets 100% of the forfeiture because we work backwards and reduce the amount the employer needs to put in to meet the objectives by the amount of forfeiture.  I don't know a client who isn't in favor of that methodology.

And since our plans don't pay people out until the year AFTER they terminate, there is never a forfeiture in the year of termination. So a guy who is not fully vested who terminates in 2020 would be paid out in 2021 and that is the year the forfeiture would occur and be used for funding in 2021.  So in our plans, the forfeiture in this case would occur in 2021 and wouldn't be allocated until that year.

And in pooled plans, all expenses can be paid out of the assets and there is no worry about what source it is coming from; it comes from the trust and is simply an expense.

[Luke Bailey]

I agree that you have to follow your plan document, but what principle of law says that you cannot use funds forfeited in 2020 to fund whatever employer wants/needs to contribute (other than elective deferrals) for 2019? I'm unaware of it. The plans I have drafted say that the forfeiture occurs as soon as the employee takes a lump sum of the vested portion of his/her balance (i.e., the forfeiture occurs immediately, not as of end of plan year or any later date), and funds can be used to pay plan expenses or offset employer contributions, without any more specificity than that.