Terminating 401(k) plan holds a large forfeiture account; what to do w

[Guest Kevin Plymyer]

I have a client who is terminating their plan. Approximately one year ago the plan went through a partial termination, since that time people have come and gone and the plan has accumulated a large sum of forfeitures. All partial termination rules were followed. Everyone involved in the partial termination was 100% vested. Now that the plan is terminating what can be done with the forfeitures? The plan document says you use the forfeitures to reduce the Employer contributions, but there haven't been any significant contributions to reduce the forfeiture account to zero. Any thoughts on this scenario?

[Erik Read]

I think it's time to make a contribution - say for the amount of the forfeitures?

[Guest Kevin Plymyer]

I failed to mention that there are only three (3) active employees left and about $35,000 in forfeitures that need to be depleted. We would most likely have a deductibility problem or maybe even 415 issues if the pays are small.

[Kristina]

What is the source of the forfeitures? Non-elective employer contribution perhaps? Were the participants who left the plan in the partial termination 100% vested, or were the forfeitures realized from their leaving the plan?

[david rigby]

Kevin,

I agree there could easily be a 415 problem. But, if you make a contribution equal to the forfeitures, what are you deducting?

[Kirk Maldonado]

How do you have forfeitures in a terminating plan? Isn't everybody supposed to become fully vested upon the termination of the plan?

[Guest]

of course, the $ could revert back to the employer and pay the nasty reversion taxes.

another possibility, amend the plan to have expenses paid by the plan (and forfeitures allocated in same manner as contribution, rather than reduce contribution). at least, my understanding is that you can do that. that might eat up enough that you can allocate the remainder and not hit 415 limits.

pax is correct (as usual) there should be no deduction problem.

[Guest Kevin Plymyer]

Thanks to everyone who replied. I see that pax is correct, I wasn't thinking straight but I can see now that there is nothing to deduct. Thanks again!

[david rigby]

If necessary, I'll be glad to perform some "services" for the plan and send an invoice to use up any amount leftover.

[Guest Kevin Plymyer]

Thanks pax, I will keep this in mind.