Forfeiture Account for Terminating Plan

[metsfan026]

I have a plan terminating that had about $20k in the Forfeiture Account.  They used some of it to pay plan expenses, but even after that there's about $12k left in there.

So who does that money get split up between?  Is it:

1. Anyone still actively employed at the time of termination (I believe it was just the owner)
2. Any person who had a balance at the time of termination

[C. B. Zeller]

A forfeiture allocation is an annual addition. So you can't allocate it to participants whose annual additions limit is zero (because their comp is zero) in the current year.

In what year did the forfeitures arise?

[metsfan026]

4 minutes ago, C. B. Zeller said:

A forfeiture allocation is an annual addition. So you can't allocate it to participants whose annual additions limit is zero (because their comp is zero) in the current year.

In what year did the forfeitures arise?

I'd have to go back, but it was probably quite a few years ago

[ratherbereading]

It should have been used each year!! Not accumulated. 

[Paul I]

As always, read the plan document!  Many documents specify exactly how forfeitures must be used.  For example, a document may say forfeitures will first be used to restore previously forfeited amounts for rehires, then used to pay plan expenses and then to reallocate anything left over.  That being said, no plan document will have a provision that allows forfeitures to be returned to the plan sponsor.

Failure to follow the plan provisions related to forfeitures is an operational failure.  Absent other guidance, this suggests a possible need for a VCP.

NOTE:  The IRS published a proposed rule on 2/27/2023 on "Use of Forfeitures in Qualified Retirement Plans".  The proposed rules are effective for plan years starting on or after 1/1/2024, and a plan can choose to apply the proposed rule earlier.  Any build up of forfeitures from prior years can be treated as if the forfeitures occurred in 2024.  Within the proposed rule, the IRS give the following example:

"Although nothing in the proposed regulations would preclude a plan document from specifying only one use for forfeitures, the plan may fail operationally if forfeitures in a given year exceed the amount that may be used for that one purpose. For example, if (1) a plan provides that forfeitures may be used solely to offset plan administrative expenses, (2) plan participants incur $25,000 of forfeitures in a plan year, and (3) the plan incurs only $10,000 in plan administrative expenses before the end of the 12-month
period following the end of that plan year, there will be $15,000 of forfeitures that remain unused after the deadline established in these proposed regulations. Thus, the plan  would incur an operational qualification failure because forfeitures remain unused at the end of the 12-month period following the end of that plan year. The plan could avoid this failure if it were amended to permit forfeitures to be used for more than one purpose."

The proposed rule also points to a possible need for a VCP.  One of the advantages of a VCP is the ability to propose a solution that is not otherwise available under the plan provisions.  That being said, I would be surprised if giving everything to the owner was acceptable.  

Good luck!

Use of Forfeitures 2023-03778.pdf

[Peter Gulia]

And that notice of proposed rulemaking helpfully states:

“Taxpayers, however, may rely on these proposed regulations for periods preceding the [proposed] applicability date.”