Earnings in Forfeiture Account

I don't usually worry about $5 or $10 in earnings in forfeiture accounts, but recently I am seeing large plans with $3500 and $5000+ in annual earnings. The employer is using forfeitures and their earnings to offset discretionary contributions. It feels wrong - the earnings part, I mean. Wouldn't this be a prohibited transaction? I feel more confident that it would be a PT if it were Safe Harbor/QNEC/QMAC contributions they were using earnings to offset. Your thoughts and guidance will be appreciated! 

CarolC, are you talking about an aggregate account that temporarily pools all funds that have been actually forfeited fair and square under the plan's rules (e.g., cash-out and buy-back and employee cashed out, or suspense account and 5 years have elapsed), or are these funds in individual suspense accounts because the plan uses the suspense account rule and the 5 years are not up yet?

It is up to the trustees to determine what asset(s) hold(s) the forfeiture funds.

Is the company using ALL the forfeiture money every year?  Keep in mind, that assets that are capable of generating large gains, probably have the specter of losses, too.  What would your feeling be if the forf account LOST $3,500?

It is my understanding that the forfeitures only can be used, per plan document of course, to reduce ER contributions. The remaining earnings are then allocated pro-rata to participant accounts. Any FF funds used to reduce must be restored by the ER if a participant is rehired prior to a 5 year break in service. Is this not correct?

In many plans. the forfeiture account can be used to pay qualified and reasonable plan expenses, and/or offset an Employer's contribution and/or be reallocated on top of the ER contrib.

The Employer will choose among the options.

I've only ever seen a handful of plans that don't allow for the fees to be paid from the forfeiture account.

Thank you and yes, for plan expenses as well. Allocating the earnings pro-rata is within ERISA regs, correct, as the participants are benefiting-not the ER??

My apologies for the delay - I was out for two days.

Mr. Luke, the forfeitures are fair and square - BG5150 they are using 100% of the forfeiture account to offset contributions. The document allows forfeitures to be used to offset contribution or pay fees if there are no account restorations required.

If the account had a loss, clearly the employer would not benefit from the use of plan assets. My thinking is along Ms. Kimberly's line - that earnings should be allocated to participants and not benefit the employer by reducing the current contribution. I realize that the employer loses the benefit of a high deduction by using the earnings to offset contributions, but I understood that the employer can use funds previously contributed - period. Am I on target?

Thank you all for your help!

CarolC, if these amounts have been forfeited and are in a forfeiture suspense account, then they (both the original amount forfeited, which will already be a mixture of allocated contributions and nonvested earnings on the nonvested portion of the allocated contributions earned while in the participant's account) can be used either as additional (or offsets to) employer contributions or to pay plan expenses, assuming that the plan document says so. There is no distinction between original contributions, forfeitures, or earnings on forfeitures.

Thank you!