Forfeiture Before 5 Years

For a partially vested participant who has terminated employment, but has not taken a distribution, is it permissible for the plan to forfeit the unvested portion of the balance before five breaks in service (subject to any restoration and continuation of vesting on rehire)?

I don't see any rule affirmatively stating that the forfeiture cannot occur. The guidance seems to say that, by implication, a forfeiture can't (shouldn't?) occur before five years because the participant may still advance on the vesting schedule if rehired. 

The pre-approved plan documents I can locate from several vendors all require five breaks in service. IRS Pub. 6389 (review of vesting provisions under 2020 RA list) also states the rule explicitly by saying a forfeiture before five years can only occur by a cash-out distribution. 

Appreciate any insight.

Perhaps if the vested balance is less than $5k and subject to involuntary distribution?  Or if you are forfeiting the entire balance under the 'lost/unlocatable' option?  What if death doesn't trigger 100% vesting, but only 1 of X bene's takes their cash out, do you then forfeit the entire unvested portion to avoid unfairly enriching the remaining bene's?

One of our client's has an individually designed profit sharing plan and non-vested balances were forfeited after 1 year break in service, so yes, it is permissible.

I could be wrong but believe if you have language to forfeit sooner than the earlier of 5 yr BIS or payout then your document also has to have language automatically restoring forfeitures if the participant is rehired within 5 years.

Thank you all. Is anyone aware of any guidance that explicitly would allow this possibility?

As mentioned in my original post, the existing guidance I can find seems fairly concrete (five years or cash-out distribution) and the ability to accelerate forfeiture seems mostly anecdotal. 

EBECatty, I thought there was a clear rule going back to the late 80's after the 1984 Retirement Equity Act lengthened the rule for disregarding service from 1 year (which was the original ERISA rule, I think) to 5 that in the absence of a voluntary cash-out and buyback you had to maintain a 5-year suspense account. I looked and could not easily find the source of that, but I thought the IRS had issued definitive guidance. Maybe a GCM? I could be misremembering.

Luke, that's what I'm seeing as well. There was a GCM (39310) and some Field Service Advices a few years later that appear to me to allow a forfeiture only after five years, unless a cashout occurs sooner. This rule is also stated without any other apparent exceptions in IRS Pub. 6389 as recently as June 2021. A few other commentaries state the five-year or cashout rule without exception. 

The regulations don't seem to affirmatively require waiting five years, but the above guidance suggests that the IRS's interpretation of the rule requires it.

Anecdotally, several people have mentioned plans getting DLs with a one-year forfeiture provision without a cashout. After the above thread, I was able to find a few plans on file with our firm that use a one-year forfeiture provision (even without a cashout) with reinstatement if the participant is rehired before five years. Those plans received DLs as recently as the mid-2010s, virtually right up to the elimination of the ongoing DL program. 

I'm not sure what to make of that, so would welcome any other thoughts on the apparent discrepancy. 

EBECatty, the plans with one-year suspense account provide that if the person comes back within 5 years their account will be restored, with earnings? Do they say that this will also occur on a plan term or partial term if the individual is affected by the partial term?

The reinstatement provision only references the forfeited amount, with no mention of earnings. There is no specific mention of this group in the plan termination provisions. Presumably a termination would vest them by law as well, but it's not explicit in the document itself.

If it's categorically impermissible, one plan may be an oversight on the part of the IRS in reviewing the DL application, but multiple plans with identical language, in addition to others who mention similar provisions above, seems more intentional. I just can't seem to find any basis for it in any published guidance or commentary.

It's purely academic at this point, but still would be curious if anyone is aware of a reason for the seeming disconnect. 

I think it just slipped through, because I think that if somehow internally in the IRS reviewer group they had decided one year was OK, they would have required language explicitly addressing earnings, termination, and partial termination. It also seems like this would be hard to administer. You're showing the person in their statement as, e.g., 40% vested, then after a year they forfeit and you show them as 100% vested in larger amount, then if they come back within 5 years you have to have an administrative scheme to put the $ back and now show them as 40% vested again. Are you sure the plans in question were set up to do that?

I agree the administration would be challenging. Knowing the parties involved, my guess is the issue has never arisen, but that's not to say it couldn't. In any event, appreciate your thoughts.