Negative vested balance after gain/loss allocation, how can I prevent?

[R. Butler]

We have a terminated participant in a 401(k) plan. The participant received a distribution and subsequently an additional deferral and match contribution. Thus the participant has small remaining balance. When I allocate losses to the participant Quantech leaves him with a negative vested balance. I know why it happens, but is there any way to prevent it?

[Guest]

Stuck, huh? Based on your info, ee is not fully paid out, and you haven't coded him such...good job.

now, as to correcting the negative vesting...you may have to use the following trick:

set up a DER for prior distrib and prior distrib (units)

(I forget which one system uses, so sue me!)

enter a value in these fields, take a look at census account data (You will have to refresh if census was open)

you can 'force' the system to show 0 vesting if need be.

it may be trial and error to start with, but you can actually work out a formula (depends on the participants vesting %) my mind no longer works properly, so trial and error and you will hit it in a few guesses. basically you are faking the system out and entering a 'positive' distribution in prior years.

Now, all that being said, this is a good spot to mention Relius calculates remaining vested balance for participants one way, and most documents call for the calculation in another way. Be very careful if you have partial distributions.

Relius does the following:

take end bal, add distributions.

multiply by vested %

this is the 'should have been distribution'

subtract actual distribution.

the remainder is the vested balance. (I don't remember if forfeures are built into this formula or not. usually you haven't forfeited the ee at this point, so it doesn't matter anyway.)

most documents I have seen use a more complex formula than this. its an ugly formula.

[R. Butler]

I can get it to zero, but the way Relius allocates doesn't make sense to me.

Example--We do quarterly reports, calendar year plan. Person 80% vested in employer money, has $100.00 balance in employer money. Paid $80 in 10/00. In 12/00 gets $20 employer contrib., thus at 12/31/00 total balance is $40, vested balance is $16. We run forward to the new year...It seems to me that any gain/loss should be allocated pro-rata between vested and nonvested balance. The only way the vested balance should get to zero is if the netire $40 is lost.

Maybe I am just missing something, but I just can't see why a gain/loss allocation should even consider amounts that were distributed in a prior period.

[Guest]

we have to live with the rules as they are, but lets walk through them.

My own 'unreal' world says the following:

ee had $100, 80% vested so was paid $80 leaving $20 balance.

Most documents I have read would require this to be forfeited immediately. (forfeitures occur upon a payout)

so perhaps that is part of the problem.

Now ee receives an additional $20. At that point, if he had forfeited, I think you would agree, it is easy to see how to calculate vested balance. (You did not indicate if ee forfeited, I will assume not)

The regs are set up how to handle things if ee was partially paid out (e.g. was paid 60% but should have been paid 80%)- so even they might not make sense, especially if there is a loss.

ok, lets walk through Relius calc.

10/31 balance 100, paid 80 so balance = 20. receives additional 20, and lets say takes a big hit of 30 loss leaving 10 in the account.

Relius calc says 10 end bal + 80 distrib = 90, ee 80% vested so vested bal should be 72, ee paid 80, so vested bal shows as -8. Uncool.

Most documents say calculate vested balance as follows:

P[AB + (R * D)] - (R * D) where P = vested %, AB = account balance, R = AB /Balance at distribution, D = distribution.

so you get 80%[10 + ([10/20] * 80)] - ({10/20}*80) =

80%[10 + 40] - 40 = 40 - 40 = 0. At least this method arrives at 0, which is better than the illogical negative, but even 0 while correct mathematically, makes little sense.

If ee had actually forfeited at time of distribution, he would have had a balance of 0, received 20 contribution, then lost $15 (half of the 30 I used in the example) this means his balance would have been $5 and at 80% he would have received $4 distribution.

"but the way Relius allocates doesn't make sense to me."

Yes and no. Relius calculates the distribution according to one of the two legitimate formulas. I walked through the other method. Most documents (certainly Corbel documents) call for the method I walked through. And remember, you have to follow the terms of the document,so you really should use that formula if that is what you have. If document is silent, then....oh well.

Relius should actually have the option on how to calculate the distribution using the 'nasty' formula.

Now the question, should you have forfeited the ees money at time of distribution? Again, most documents call for forfeitures upon being fully paid out. ugh, especially since he was still due a contribution, he wasn't technically fully paid out. perhaps at 10/31 he was fully paid out as of that date, but what if he was only paid out the vested portion and not deferrals as of that date. I have seen that happen. then should he have forfeited?

did I bore you with all this? or did any of that make sense?

[R. Butler]

I don't know if it all makes sense, but I do appreciate the detailed explained. Works still piling, but within the next few weeks I will print this out and study it thoroughly.

Thanks again.