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May an employer use forfeitures to reduce 401(k) contributions?


Peter Gulia

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An employer/plan administrator and its recordkeeper have a difference in views about whether the employer may use forfeitures to reduce the employer’s obligation to pay 401(k) salary-reduction contributions.

The recordkeeper says the employer may use forfeitures only against matching or non-elective contributions.

The employer might prefer to use forfeitures against any contribution that the employer otherwise would be obliged to pay.

The plan, which has not only a volume-submitter letter but also an individual IRS determination, states: “Forfeitures … will be … used to reduce any Employer contribution (e.g., matching, profit sharing[,] or ADP test safe harbor contribution).”

Even if the c in contribution were capitalized, the plan does not set up “Employer Contribution” as a defined term. And the exempli gratia (for example) signal that leads the parenthetical phrase means that the phrase is a non-restrictive illustration of less than all of the possible kinds of employer contribution.

Perhaps a convention suggests using forfeitures only against matching or nonelective contributions. But is this a hard constraint?

Isn’t a 401(k) contribution an employer contribution? (An employee agrees to a salary reduction in exchange for her employer’s contribution to the plan.) If so, isn’t it within what the plan’s text says about using forfeitures to reduce any employer contribution?

Or is there some other reason forfeitures must not be used against salary-reduction contributions?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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here is the LRM released in 2011 (Listing of Required Modifications) It describes the use of forfeitures quite plainly. (see page 16 and 38)

(OK, I only highlighted the items, I guess I could have typed over the info to make it say something else, but I didn't)

thus, despite having approved documents that say you could use forfeitures for this and that, these are changes that are required (or at least going to be required) (and thus would show up once you restate your document somewhere down the road).

one of the reasons, at least in regards to safe harbor contributions, is the requirement that 'safe harbor contributions must be 100% vested when made to the plan' -

well obviously forfeitures were not 100% vested when made to the plan. (The 100% vested exception of course would be discretionary match contributions)

coda lrm.pdf

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Tom Poje, thank you for the super help!!!

The LRM says “forfeitures cannot be used as … Elective Deferrals.”

But can the BenefitsLink mavens help me understand why the IRS so interprets the Internal Revenue Code?

(If it matters, this plan does not provide and never received any qualified nonelective contribution or qualified matching contribution, nor any kind of safe-harbor contribution.)

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I'd say the same reason as for safe harbor contributions - deferrals are 100 vested when made to the plan and forfeitures aren't.

I guess my question is what situation arose that forfeitures needed to be substituted for deferrals?

(Thanks for reminding me I even saved this LRM a year or so ago)

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Off the record possibility: ERISA would never stand for amounts to be taken from employees and never actually be delivered to the plan. The IRS steps away from the tax fiction that makes elective contibutions "employer" contributions to recognize the legitimacy of the ERISA view. But don't ask the IRS to say that.

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Just curious, if you were going to use forfeitures to pay for 401(k) contributions, what would the employer do with the 401(k) money?! Obviously keep it, but in accounting terms, how would they reconcile their books?

I think deferral contributions are "employer" contributions in a very narrow sense of the word, but not for this purpose.

Ed Snyder

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Forfeitures don't satisfy the timing requirements for salary deferrals under:

1.401(k)-1(a)(3)(iii)

©Contribution may not precede services

(1)General rule.—

Contributions are made pursuant to a cash or deferred election only if the contributions are made after the employee's performance of service with respect to which the contributions are made (or when the cash or other taxable benefit would be currently available, if earlier).

(2)Exception for bona fide administrative considerations.—

The timing of contributions will not be treated as failing to satisfy the requirements of this paragraph (a)(3)(iii)© merely because contributions for a pay period are occasionally made before the services with respect to that pay period are performed, provided the contributions are made early in order to accommodate bona fide administrative considerations (for example, the temporary absence of the bookkeeper with responsibility to transmit contributions to the plan) and are not paid early with a principal purpose of accelerating deductions.

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Thank you, Tom Poje, QDROphile, masteff, Bird, and Kevin C. for your great help.

Not only did I learn something today, for the first time in my 29 years of employee-benefits practice I found a use for a determination letter.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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  • 2 weeks later...

most of our plans submit the safe harbor match on a per pay period. At times, the higher paid EEs receive a safe match > limit, because they continue to defer on comp > IRS comp limit.

When this occurs, I forfeit the excess safe harbor match.

I believe that it would be reasonable to apply the forfeited excess against a future safe harbor.

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legort69:

This is completely off-topic, and I can't quite tell from your description, but I am always suspicious when some limit relating to deferrals applies with respect to the 401(a)(17) limit on compensation that the plan is, shall we say, not optimally designed because of a misconception about how the 401(a) (17) limit operates.

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