Allocating Forfeiture Account For Terminated Plan

I have a Plan that's terminating.  Can they allocate the Forfeiture Account to any active participant at the time of Plan termination?  They had a few people who had been terminated for at least 6 years, 100% vested, that just refused to take their money from the Plan.  They want to avoid giving money to them from the Forfeiture Account, if possible.

Thanks!

What does the plan say on allocating forfeitures? Also, remember that forfeitures count as annual additions under 415 and a person without 415 compensation for a given plan year has a 415 limit of zero.

11 minutes ago, CuseFan said:

What does the plan say on allocating forfeitures? Also, remember that forfeitures count as annual additions under 415 and a person without 415 compensation for a given plan year has a 415 limit of zero.

So it would just go to the people active at the time of termination, correct?

Depends on what the plan says for allocation conditions - it could also include people that terminated during the year. Also, pay attention to timing, when the forfeitures occur and when plan says they are to be allocated. If you're holding forfeitures that should have been allocated at 12/31/2022 and want to allocate them at a plan termination date of 11/30/2023 only those active on such date, that is an issue.

Read the plan, follow its terms, and just treat your plan termination date as your latest plan year end and you should find out exactly what you should do or should have done.

As CuseFan says, read the document as to how Forfeitures are allocated.

Most typical in this situation is the forfeitures would be used to pay administrative expenses if allowed or allocated as a "Profit Sharing" contribution to eligible participants under the Plan's allocation formula . It's also possible it might be allocated as a match if the plan allows. And as CF points out, it is an annual addition subject to 415 limits and any other applicable IRS testing included but not limited to ACP, 401(a)(4), 410(b) and 416, if applicable. Though they don't count against 404.

If the plan’s governing documents provide that forfeitures are used first for plan-administration expenses, the plan’s fiduciaries might consider paying outstanding expenses, reimbursing the employer for its recent payments of expenses it was not obligated to pay, and prepaying prudently anticipated plan-administration expenses.

With a plan’s discontinuance and termination, it can be wise (especially if the employer too is or soon will become defunct) to see to it that service providers—lawyers, accountants, recordkeepers, third-party administrators (!)—are paid before the plan’s final distributions to participants and beneficiaries.

I’ve advised on situations in which a plan’s administrator didn’t think to prepay or reserve for final plan-administration expenses. That can result in unpleasant consequences for former executives of the defunct employer. In some situations, the Labor department asserts that a human who was the plan’s fiduciary is personally liable to pay for needed services, including those needed to prepare the final Form 5500 report with an independent qualified public accountant’s audit of the plan’s financial statements.

Of course, on plan termination everyone is fully vested, so presumably the forfeitures in question are for individuals who terminated before the plan was terminated or a termination was being seriously considered by the employer. Also, unless the plan had an immediate forfeiture and buyback provision (which, admittedly, most do), some folks who left before termination may have forfeitable amounts that are still credited to their accounts and would become vested in connection with the termination.