Amending a plan to forfeit immediately instead of holding forfeited ba

[AndyT]

A PS plan currently states that forfeitures do not occur until the terminated participant has 5 consecutive 1-year breaks in service. Therefore, the plan is carrying forfeited balances for terminated people back to 1995 or so.

The plan sponsor wants to amend this provision to forfeit balances upon the earlier of 5 years or when the vested balance is distributed.

Once this amendment is adopted, are we able to forfeit all those old balances immediately? Forfeitures are reallocated at year-end (12/31). It just seems a little odd to me that all the forfeitures from the last 5 years will be reallocated in one plan year. Does the amendment have to be effective prospectively? Are there any 411(d)(6) or 401(a)(4) issues to worry about?

[IRC401]

You have two issues (which are probably more theoretical than real):

(1) If the plan is terminated before all of the pre-amendment terminees have a five year break in service, you might need to vest anyone who hasn't had a five year break in serivce.

(2) If the amendment is made at a time that an unusually large portion of the forfeitures are allocated to HCEs, there might be a discrimination issue.

NB: If you restate the plan for GUST, be careful about effective dates.

[Guest carsca]

Could you please provide a cite which would support the decision of the plan to take forfeitures upon the employee's termination immediately rather than wait five years?

[AndyT]

Carsca,

Clarification, the forfeiture does not occur when a participant terminates (unless he or she is 0% vested); it occurs when they receive the vested portion of their account balance.

I don't have a cite, but I know it's out there (probably under Code Section 411 or the Regs for 411).

The IRS approves plan documents daily that have the immediate forfeiture provision. I would say at least 90% of defined contribution plans have this provision rather than the 5-year wait.

Andy T.

[Guest carsca]

Andy,

Thanks for your response. Please clarify your post:

I understand and agree that the IRS approves plans that immediatly apply a forfeiture in the case where the participant receives a distribution upon termination of employment.

However, what happens in the case where the participant in 60% vested, terminates and does not take a distribution. In that case, may the plan immediately use the 40% nonvested portion and apply it as a forfeiture or must the plan wait five years?

[AndyT]

Carsca,

In your example, the plan cannot forfeit the 40% until the participant actually receives the distribution. Most plan documents read something like this:

Forfeitures will occur the earlier of (a) when the vested account balance is distributed to the participant or (B) 5 consecutive one year breaks-in-service.

They usually add that if the participant is 0% vested, the forfeiture occurs at the time of termination.

[Guest carsca]

Just to further refine the question:

In the case where the participant terminates employment and does not take a distribution, there is no doubt that a "Forfeiture" cannot take place until five years after the participant terminates.

However, the question is MAY a plan use the 40% nonvested portion immediately (say, to reduce the employer's matching contribution obligation) upon the participant's termination of employment. (In the event the participant returns within five years, the plan will return the $$ to his or her account.)

[AndyT]

No that cannot be done, as far as I know.