Forfeiture Account Funds to Pay Earnings

Hi.  Company A is being acquired by Company B (A's 401k plan is merging into B's).  Company A mistakenly terminated its employees and distributed the accounts.  My understanding is that this is an improper in-service withdrawal and is treated as an overpayment under EPCRS rules.  The correction rules (6.06(4)(b)) provide that the affected participants should be notified and asked to return the distributed amounts, plus earnings.  My question is related to the earnings.  Is it permissible to have the participant return the distributed principal and use the forfeiture account to fund the earnings?  My concern is that the participants will already be upset.  To add insult to injury, it is possible that the earnings rate on their 401k plan account outpaced their earnings rate on wherever they put the money after distribution; meaning that they may have to come out of pocket to make up the earnings.  

15 hours ago, waid10 said:

Hi.  Company A is being acquired by Company B (A's 401k plan is merging into B's).  Company A mistakenly terminated its employees and distributed the accounts.  My understanding is that this is an improper in-service withdrawal and is treated as an overpayment under EPCRS rules.  The correction rules (6.06(4)(b)) provide that the affected participants should be notified and asked to return the distributed amounts, plus earnings.  My question is related to the earnings.  Is it permissible to have the participant return the distributed principal and use the forfeiture account to fund the earnings?  My concern is that the participants will already be upset.  To add insult to injury, it is possible that the earnings rate on their 401k plan account outpaced their earnings rate on wherever they put the money after distribution; meaning that they may have to come out of pocket to make up the earnings.  

 

This sounds like an employer/plan admin error, why would you make the participants pay for it? 

@RatherBeGolfingYou are right.  I should have phrased my question better.  Company A's TPA made the mistake in terminated the employees and distributing the accounts.  Now Company B is trying to sort out the correction.  Company A's plan will merge into Company B's plan.  Company A's plan does have a small forfeiture account.  Company B's account has a large forfeiture account.  Is it permissible for Company B to use forfeitures for the earnings that will need to be contributed?  Can they use forfeitures from either plan?  Or does it need to be from just the Company A plan?  I guess once the plans are merged, the forfeiture accounts will merge as well, so maybe this last question doesn't matter.  

My guess is that if it isn't permissible to use forfeitures, Company B will make up any difference so that participants don't suffer any losses.

Thanks for any thoughts.