Expert: Shirley McAllister, CPP, PHR - 11/4/2010

Question
QUESTION: When a company uses the forfeited account for 401k to offset the company future contributions and plan expenses, is it recorded on the company's book, or is it just a disclosure on the financials.  If it is recorded on the book, how should it be recorded.

ANSWER: Hi Bettsie,

First off I have to let you know that the forfeited amount can only be used for plan expenses and not for contributions. It cannot be used for the matching amount nor for profit sharing. It can be used for expenses and administrative costs.

I record mine on the books as a forfeiture and I record a debit to the 401K account and a credit to the Employer 401K expense account

My entry for General Ledger looks like this:

211650 401K Payable        CR 3200.00
809000 401K Employer Cost  DB 3200.00

Shirley



---------- FOLLOW-UP ----------

QUESTION: Shirley,

I have consulted other sources and my understanding is that the forfeited acct can be used to offset the company's future contributions (matching or retirement) and plan expenses.  Can you please verify.
Thanks

Answer
Hi Bettsie,

You could be right for your plan.  What it actually says is "In the event taht a participant leaves before fully vesting and forfeits plan benefits during a plan year, the plan must designate how forfeitures are handled."

This tells me that it is per individual plan. Our plan does not allow designation for employer contributions.

REV.Rul.84-156, 1984-2 C.B. 97 says (acceptable to use forfeitures first to pay administrative expenses, then reduce employer contributions.)

I guess your plan is written differently from mine, but it is acceptable to use for contributions if your plan is written so.

Shirley