We have a client who has a money purchase plan they want to terminate. In 2000 there were 2 employees eligible and participating. Both of these employees terminated by the end of 2001. Neither one of them was vested, so they forfeited their money. None of the other employees have been there long enough yet to enter the plan. Does the forfeited money just get paid back to the Plan Sponsor?

I think that a partial termination occurred when the participants left. a reduction in participation of 100%./ The impact is that the participants who left would vest 100% and be entitled to those funds.

If these employees quit, you may want to review IRS guidance and case law to determine whether the employees may be excluded in determining reduction in participation for partial termination purposes.

If not a partial termination, the termination of the plan will require effected employees to be 100% vested. Under the IRS's position, whether the terminated employees are effected employees depends upon whether they have an account balance at plan termination, which in turn, will depend upon the plan's forfeiture and cash out and buy back rules.

At termination of defined contribution plan, funds can be returned to the employer only to extent cannot be allocated to participants under Code 415.

If there were no participants, how are/were were forfeitures allocated?

The forfeitures haven't been allocated yet. The plan document says that they will be used to reduce contributions in the year following the year the forfeiture occurs. In this case, there is no contribution in the year following the forfeiture

Assuming a partial termination occurred when they left, the vesting occurs upon their leaving not at the end of the year.

there does not appear to be any forfieture to allocate, again assuming you recognize the partial termination.

Isnt the real question what will happen if there is a reversion of the forfeited assets to the employer??? Under IRC 4980(d) a reversion of plan assets to the er is subject to a 50% excise tax as well as income taxes which generaly results in 90-95% of the assts going to the govt. The er should find a way to distribute the forfeitures among the remaining employees by amending the plan to make them participants and then terminate the plan to vest all participants 100% in the accounts. Or the plan can be terminated as of the date the former participants left and they would be 100% vested.

First, why would there be a partial termination when the two employees left, presuming they left voluntarily? Don't you need both a corporate action and a reduction in participants in order for a partial termination to occur?

Second, as RTK noted, you can't have a reversion from a DC plan unless you have 415 suspenses -- which doesn't seem to be the case here.

I agree with mbozek -- you need to amend the plan so that some of the current employees get an allocation and become vested. Then you can terminate.

I am focused on the partial termination because I understood from your posting that these terminated participants were the only participants in the plan at the time of their termination.

No, a partial termination requires no corporate action, it occurs by operation of law.

Otherwise, I agree with Mbozek, in a DC plan unless it is a mistake of fact contribution, there can not be a reversion to the employer.

What I mean is that reduction in participation has to be caused by employer's actions -- e.g., a plan amendment, firing, layoff, etc. If you only have a reduction in participation by voluntary termination and no action of the employer, then you don't have a partial termination.