As an extension to the discussion on vesting in 403(b) plans with employer contributions, does anyone have any experience in how forfeitures are handled. If they reduce the employer contribution, is the nonvested portion of the account returned to the employer to offset the next contribution? Does he have to find a vendor who sets up a forfeiture account?

Any information on the practical application would be appreciated.

I've never seen where anyone has come up with a cost effective solution.

Applying any plan wide activity to a bunch of individual 403(b) contracts is like herding cats. Frustrating for you, annoying for the cats, and the herd never makes it to the end of the trail.

Doesnt this problem go away in a group annuity contract which is the vehicle for most employer sponsored plans? I think its a systems issue-can the recordkeeper keep track of the years of service for vesting in er contributions. The forfeited amounts can be used to reduce contributons or allocated among reminaing participants.

If all of the 403(b) participants are under a single annuity contract and the RK system handles it, there shouldn't be a problem. I'd be surprised to find a RK system that couldn't adequately handle forfeitures.

However, my bet is that like a lot of 403(b)’s, each of the participants has one or more individual 403(b) annuity contracts scattered across any number of financial institutions.

It might be possible to find a TPA to handle just the employer contribution piece of it, but the co-ordination, reporting, testing issues that would require info from the individual contracts and the employer contribution piece gets to be a complex and expensive process.

Janhubber;
Are they individual contracts or one big contract with individual accounts?

Here is yet an another reason for the Congress to revise section 403(b) in a fundamental way!! How would this problem be handled in a Section 403(b)7 Cusodial Account for investment in mutual funds?

Joel L. Frank

Why is this a problem? The non forfeitable benefits % is determined at termination of employment the same as in any other DC plan, e.g., ps or mp and the vesting schedule is disclosed in the spd.

The current arrangement for this employer is several different vendors and individual annuity contracts for each of the participants. One issue is how to get the forfeiture from a non-vested terminated participant to reduce the contributions. Can it be returned to the employer to a special account and included with the next contribution deposited? It seems to me that must violate the exclusive benefit sections of ERISA. So does each vendor have to set up a forfeiture account for all forfeitures from contracts held by employees of this employer and use that to offset the contribution requirements?

Any advice from someone with practical experience in this scenario would be appreciated.

Jan: If the contracts are individually owned then the funds will be non forfeitable unless there is a rider that provides for vesting because the employee owns the contract. You need to have counsel review the contracts to see if non vested funds can be removed. Are the provisions for vesting of er contributions located in the plan document?

The current contracts only have salary deferrals and a fully vested match in them. The employer is now toying with the idea of adding an employer contribution with a vesting schedule and doesn't understand why this might pose a problem under the current funding arrangement. So I was trying to find out what experience other practioners had with this type of arrangement.

In order to use deferred vesting employer must fund plan with a group annuity.

mbozek, would you give us the authority for your comment? Thank you.

The question is one of implimentation, not authority If the employee owns an individual contract all contributions will be non forfeitable. If the employer wants to use deferred vesting then the funding vehicle must be a group annuity issued to the employer (or custodial account agreement) which references the vesting schedule in the plan.