You may have terminated participants in your qualified retirement plan who are zero percent vested in their account balance. How long do you need to keep them in the plan as plan participants? The plan document should have language which clarifies when to forfeit a non-vested account balance for a terminated participant. The most common forfeiture language that we see states that a forfeiture of non-vested balances occurs after the earlier of five consecutive one-year breaks-in-service or distribution of the vested account balance to the terminated participant. A break-in-service is usually defined as a plan year in which a participant worked less than 501 hours of service.
Many plan documents that we administer have “deemed distribution” language. This language states that a participant who is zero percent vested shall be deemed to have received a complete distribution of their vested account balance, either upon their termination of employment or as of the last day of the plan year in which they terminated employment. If your plan document states that a forfeiture occurs upon payment of the vested balance, with this deemed distribution language the participant is deemed to have received their distribution and therefore can forfeit their non-vested balance in their year of termination.
What if the terminated participant is entitled to an allocation of contributions in their year of termination? Some plans we administer are drafted to state that in the event a participant receives an allocation of contributions in their year of termination, they are not deemed to have received a distribution until the year following when they received their last allocation. In that case, the deemed distribution and forfeiture of their account would occur in the next plan year.
The primary benefit of deemed distribution language is cleaning up those small account balances sitting in former employees’ accounts. It allows their balances to be reallocated to your active employees in a timelier manner. In addition, clearing out those balances decreases your participant count in the plan, which may have an impact on fees.
If you have questions regarding whether you have deemed distribution language in your plan, please contact your Blue Ridge ESOP Associates plan administrator.