Finally, we are converting annually valuated plans to daily. This conversion requires cleanup of large suspense balances caused by years of over - contributions and forfeitures. Can these balances be returned to the employer? OR do they have to stay in the Plan to reduce future contributions? Some of the balances may take months & possibly years to deplete.

Paying money out to the employer is extremely hazardous. Section 401(a)(2) (which applies to governmental as well as private plans) provides that trust assets must be used only for the benefit of participants and beneficiaries. The very limited exceptions to that rule would probably not apply to this situation.

On the other hand, offsets of future contributions are not a problem under federal law. (You would, of course, also need to make sure they would not be a problem under applicable state and local law.) Because federal law does not regulate funding of governmental plans, you can reduce future contributions as much as you want, for any purpose, without triggering a federal law issue.