Allocating forfeitures to individuals who decide not to participate in

[Guest Bill Schulze]

Our plan makes everyone over 21 eligible on date of hire. We have 7 employees who choose not to participate. We match $ for $ up to 3%. There were some forfeitures last year, and the TPA allocated the forteitures to all eligible participants which included the 7 who do not participate. I questioned this and was told that the definition of participants is the same as eligible participants as our plan does state in the prototype that I neglected to read thoroughly that "an eligible employee who has become eligible to be a participant shall become a participant effective as of the day specified in the adoption agreement." Notwithstanding this, I still protested that allocating forfeitures to employees who choose not to be in the plan is illogical and absurd. We could have elected to use forfeitures to reduce the match. If so then these 7 would have gotten nothing. Can someone help me with this as I have a real problem setting up an account and allocating dollars to individuals who consciously decide not to participate. Any ideas other than using forfeitures to reduce match?

[R. Butler]

Most documents allow provide the option of using forfeitures of employer matching contributions to be used as a discretionary match. This would exclude people who do not defer.

[Guest Rudy]

The prototype document we use allows an employer to elect to forfeit only to those participants who were eligible to receive a match. I hope this option remains in the GUST version of the prototype. Check your document to see if the same option exists (of course, the coverage test must pass using this method).

[Guest]

You have to be careful with the terminology used.

1. the term 'chose not to be in the plan' was used. did the people actually

'elect out' (e.g. sign a form indicating this) or did they simply 'elect not to defer'. those are two different animals.

2. if they actually elected 'out' (assuming the document permits this) then yes, they are not eligible for forfeitures. ===>by electing out they receive no forfeitures and therefore can max out there IRA without any restrictions. thats the only reason I can think of why someone would actually elect out. HOWEVER, when testing coverage under 401(a) these people are treated as includable and NOT benefiting as well, which could cause coverage failure. [for the 401(k) and 401(m) portion of coverage they are treated as includable and benefiting.]

I doubt this is the case, the people probably chose not to defer, rather than not to participate. (if plan was top heavy they would still receive top heavy minimums. if a profit sharing contribution was made, they would receive that as well)again, there is a big difference between not deferring and not participating. or perhaps a better term would be 'not deferring at this time, but maybe next year.

'electing out' is forever.

[Guest Bill Schulze]

The employees did not elect out; they just did not enroll. We do not make a profit sharing contribution to the plan while the plan does allow for that. It's really a 401(k) plan with the profit sharing add on in case we want to do that at some time in the future. Let me pose another question: could we retroactively ammend plan to use forfeitures to reduce the match? We have not handed out the quartely statements to the 7 employees who received forfeitures. Incidentally, the largest amount on any one of these non-participant "participants" was $51. As you can tell, I have a real problem with setting up an account for someone who makes a decision not to participate in a plan that provides company matching.

[Jon Chambers]

You can't retroactively amend after the benefit accrues. And the benefit accrued when the participant satisfied all requirements to receive the allocation. So you have to follow the terms of the plan for the current forfeiture allocation. Of course, you can amend the plan prospectively.

I understand how you feel about allocating forfeitures to participants who didn't elect to defer. In this circumstance, the plan should have been drafted to indicate that forfeitures would either offset or increment matching contributions.

Incidentally, for technical reasons, there is no such thing as "a 401(k) plan with the profit sharing add on", it's "a profit sharing plan with a 401(k) add on." (The Internal Revenue Code doesn't recognize 401(k) PLANS, only 401(k) FEATURES of profit sharing plans.)

[actuarysmith]

I concur completely with the response immediately above. Unfortunately, you are likely stuck with a result that you deem "absurd".

You should amend the plan document (prosectively, of course) to either go to 100% vesting or use forfs to reduce the match. For now, you are stuck with these great little $7.98 account balances (been there- done that- won't do it again!)

[Guest Bill Schulze]

Yes, it surely sounds like I'm stuck on this one. What makes this even more frustrating is that we pay all expenses for the plan, and it costs us more per account than the balance in these small accounts. Yuk. I think I will ammend the plan to use forfeitures to reduce the match, then terminate these employees so that their balance will be forfeited and they will never know the difference! (Just kidding, and I guess most of these participants are fully vested.) For future reference, could I have changed the prototype to read that a participant is an employee who meets eligibility requirements and enrolls in the plan rather than an employee becomes a participant on the day he meets eligibility requirements?

[Earl]

How about instituting a policy to charge all employees a flat rate admin expense/qtr or /yr.?

You could use up that money allocated to those people due to poor document drafting.

Then, to prevent an employee revolt, you could also bump up the match to cover that expense. If non-deferers are still not deferring, you wash them out of the plan and the deferers are still "whole". You could probably get rid of them in a qtr or 2.

You should probably be careful how you do it, though. Sounds like something the DOL would love to hear about, but it seems it would be possible.

[IRC401]

Be careful how you define participant in the plan document. Someone who is eligible to make 401(k) contributions but elects not to is a particpant for purposes of filing Form 5500, doing 410(B) testing, and ADP/ACP testing.

It should be possible to elect to use the forfeitures to reduce the matching contribution.