Reallocation of Shares During 5-Year Break in Service Period

Hello,

While the issue does not come up exactly in the context of an ESOP, the administration of the Plan/Fund is similar enough to ask the question here.

Can a Plan Administrator reallocate the unvested shares of an employee who has currently left the employ of the company to other participants before a "forfeiture" event (i.e. 5-year break in service or distribution)? The idea is to keep the account "open" and accounted for, but have the shares reallocated. In the event the employee comes back before a forfeiture event, the shares would be reissued/contributed/reallocated to the returning employee.

The Volume Submitter Plan this fund is based off of states that the Plan Administrator will continue to hold the undistributed, non-vested portion of the account of a participant until a forfeiture event, so I believe that as the plan is written, the stock would need to remain in the account and not be reallocated. However, can the plan be amended to state that only the account will remain "on file" but allow for the stock to be redistributed?

On a similar note, can a plan be amended to shorten or do away with the 5-year break in service requirement (other than by allowing a distribution)?

I am pretty certain that one cannot because the ERISA Outline Book (2016) makes no mention of it;  because seems IRC Sec. 411 requires a 5 year period; and because of the issues of cost basis and the deduction of additional contributions (to make up for growth-or is growth even accounted for during the break in service period?), but my assigning attorney is pretty certain that the Plan can be amended to shorten the time before forfeiture.

Full Disclosure: I am a summer associate, but I intend to work in the Benefits practice and have found this forum helpful.

I would appreciate some guidance as to additional resources I can look at.

Thanks!

If the plan actually says a person doesn't forfeit until they have 5 BIS that is how the plan needs to operate.  That is one of the fundamental rules of this business.  You operate according to the document.  So in my mind if it says a person doesn't forfeit until 5 BIS you keep the shares in the person's account until they have 5 BIS.

Yes, you can shorten the time at least going forward.  I would have to think about people who termed in the past.  We have plenty of ESOPs that say you forfeit upon full payment or 1 BIS.  You just have to restore people's balances under some conditions. 

If it is possible for a person to have a balance and be 0% vested look for a deemed distribution provision that says such a person is deemed to be fully distributions upon termination.  This would allow you to forfeit that person in the year of termination but would need to be restored if rehired within a given time period. 

The conditions of when a restore happens and and if you restore to the dollar amount forfeited in the past or shares (in effect giving them gains/losses on the shares) will be spelled out in the document.  Most ESOPs  say without earnings.  So if the person had 100 shares with $1,000 that were forfeited and the price has doubled you would restore 50 shares giving a $1,000 balance restored.  But it could say restore the 100 shares for a restored value of $2,000 in my example.  

A word of advice from an old DC/ESOP person.  The guy who trained me in this business had one hard rule you had to obey.  You couldn't come into his office with a question without the document in your hand.  You better have tried to find the answer in that document.  If you came into his office without the document he would tell you to turn around and try and again and nothing else.  The ERISA Outline Book is great, this forum is great but 99% of your questions on how a plan ought to operate can be found in the document.  Obviously, questions like can we change a document to say this or that isn't there but how it ought to work is there 99% of the time.  If you want to excel in this business learn to read documents.  

Once again the document should answer when all of your questions regarding this topic at least in terms of how it ought to be operating now.  The plan has to have those answers so they are there for these questions.