What do you do with a SIMPLE 401(k) plan with forfeitures from previou

[Guest Cato]

Question on the following scenerio:

Section 401(k) plan contains participant profit sharing balances that are not fully vested. The plan subsequenctly amends to become a SIMPLE 401(k) plan.

What happens to the nonvested profit sharing money if it becomes forfeitures (in future years) while the plan is a SIMPLE 401(k) plan? (The document states that forfeitures are used to reduce future employer contributions.)

Can the employer use the forfeitures to reduce SIMPLE 401(k) match or nonelective contributions?

Would they be stored in a suspense/forfeiture account indefinately?

Other options/requirements for handling the forfeitures?

[wmyer]

The forfeitures would be used to reduce the matching or non-elective contribution. They can't be used as an additional contribution, because no additional contributions are permitted in a SIMPLE plan. The plan document probably specifies something about the timing of forfeiture, so it wouldn't be held in the forfeiture account indefinitely.

[Guest FredReilly]

I think you need to check the Notices regarding SIMPLES. There is an exception to the "no other plan" requirement for allocation of forfeitures only. There may need to be a plan amendment changing the wording to simply a comp to comp allocation. That might even be a document qualification requirement for a SIMPLE that would be required in a GUST determination letter request.

I don't see any quidance on the use of forfeitures to reduce SIMPLE employer contributions of any kind. I guess you can get guidance by proposing same in your determination letter request.

In any case forfeitures cannot be placed into an indefinite suspense account. I can't find the cite, but I am sure that this is a disqualifying event and possibly an exclusive benefit violation.

[Guest Cato]

Notice 98-4 (SIMPLE IRAs) says that the "exclusive plan rule" will not be violated by allocating forfeitures in another plan of the employer. We are not dealing with an exclusive plan rule clearly in this situation as the employer did not start a second plan as a SIMPLE 401(k). The existing 401(k) plan was amended to become a SIMPLE 401(k) plan. Also, Rev. Proc 97-9 on 401(k) SIMPLES does not mention anything about forfeitures. It only states matching, nonelective, or rollover contributions as allowable contributions.