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Today's IRS Q&A at ASPPA Annual Conference 10/20/10


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Guest Pennysaver

Apparently, the question of whether forfeitures may be used to reduce safe harbor contributions to a plan was discussed in an IRS Q&A session today at the ASPPA Annual Conference. Did anyone hear the exact response?

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I could not attend (unless I took a later a floght and wouldn't get back until much later than this tired old body cared to), but one individual indicated to me the response was

......

Rhonda Migdail said it could be argued for forfeitures to be used for Safe Harbor contributions, but not for QMACs and QNECs.

QACAs are not subject to immediate vesting, so forfeitures can be used.

......

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Remember that the responses given by the individuals are NOT official guidance.

Rhonda said they could NOT be used for Safe Harbor, but maybe for Qnec and Qmac. SHe was depending on the language in the law that says contributions must be non-forfeitable when contributed and obviously forfeitures were not 100% vested when contributed.

THis belies a fundamental misunderstanding and contributions and allocations as pointed out by Sal Tripodi, a fundamental misunderstanding that forfeitures are used in lieu of employer contributions, and not understanding the guidance we received from the IRS of what happens to forfeitures in a money purchase plan when the plan is merged into a profit sharing plan.

Also note that most documents contain language that forfeitures may be used for any employer contributions including Safe Harbor contributions.

I for one will not pay any attention to the answer. It is just wrong.

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Guest PiggyBank

Hmmmm..... I was there, but I heard something different:

May forfeitures be used to reduce:

Employee Salary Deferrals (since they are employer contributions)?: NO

Safe Harbor contributions?: NO

QNEC?: NO

QMAC?: NO

QACA?: YES

I think I remember Rhonda Migdail saying that forfeitures maybe could be used to reduce a Safe Harbor Nonelective contribution, but there was a second IRS representative on the panel, Don Kieffer, and he talked about 1.401(k)-6 and its requirement that contributions be 100% vested when made to the plan, which rules out the use of forfeitures to fund contributions subject to this requirement (according to him). He also mentioned an IRS Alert Guideline (document #7335) and said it was unofficial guidance on this subject.

Like rcline46 said, this just doesn't sound right. It doesn't make sense that just because a forfeiture wasn't nonforfeitable when it was originally made to the plan, that this would rule out its use to reduce a later employer contribution to the plan, since when it is being used to reduce a Safe Harbor contribution it is nonforfeitable when it is allocated to the participants. Why wouldn't it be deemed to be contributed to the plan at the time of the Safe Harbor contribution, despite the contribution's prior life as a forfeiture? Also, it didn't seem like the members of the panel for the Q&A were in agreement on the answer to this question.

Hope this helps.... (unless someone else heard something different, too....)

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Thank you for the explanation, it does not appear to be overly heavily biased in any way . (might not get you a job with CNN or FOX, but that's another story) :lol:

The IRS response is the response I would have expected, based on a strict interpretation of the regs that say QNECs and QMACs must be 100% vested when made to the plan.

now as to whether things should be interpreted that way is another matter, or if that reg could be overridden by looking at forfeitures and saying 'forfeitures can be used to reduce ANY contribution' does not appear to have been discussed.

I think to say "responses given by the individuals are NOT official guidance" oversimplifies things. Having been on the Q and A committee at one time, it is also a fact that (unless you have a question submitted from the audience on the same day)

1. All questions are submitted to the IRS folks early Sept (giving them a chance to review them)

2. Meeting with the IRS agents mid Sept to discuss the question.

this gives a full month afterwards for the IRS agents to also sound off amongst others regarding this issue and possibly change it. In this particular case, no answer was provided on the sheet before hand, so I think that shows it was something felt worthy of further discussion rather than a simple answer. and certainly not an off the cuff answer "we think its this way..."

in addition, this 'answer' is no different than the answer provided in an IRS webinar (or whatever) months before by a different agent, so it's not simply one or two individuals who feel this way.

my own opinion is you can't disagree with the statement that QNECs have to be 100% vested when made to the plan. I don't think you say the IRS is wrong in that interpretation. as to whether the use of forfeitures can override this - I'd lean towards saying yes - thats my opinion - but since it doesn't sound like this point was discussed one way or the other I'm not sure you can make a blanket statement the IRS is wrong.

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I am not involved with defined contribution plans, but I am a bit confused by the logic of saying "you can't use forfeitures for [some stated purpose] because contributions for [that stated purpose] must be non-forfeitable at all times." I understand that concept but don't understand how that could mean that you can't use forfeitures (which, being forfeitures, must have been related to some other source under the plan, which clearly did not have to be automatically nonforfeitable, since they were forfeited).

Suppose that, for example, a plan encompasses 401(k) salary reduction amounts (which, as I understand, must always be nonforfeitable), matching contributions (not sure whether or not), and discretionary profit sharing amounts (which can certainly be subject to a vesting schedule). Suppose that some short-service people terminate without being vested in recent discretionary profit sharing amounts, and there are forfeitures. Why couldn't those amounts, having in fact been forfeited, be used to reduce the amounts which the employer is otherwise required under the terms of the plan to contribute, even if the amounts, once so applied, cannot ever again be forfeited? Unless, of course, the rule is that all forfeitures must be applied to increase benefits, so they can't be used to reduce employer contributions and therefore, perforce, could not be applied towards safe-harbor contributions.

Always check with your actuary first!

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Guest PiggyBank

Hi, Tom.

Not sure if you were addressing my reply or rcline46's reply. Anyway, I didn't say IRS was wrong, I said it didn't sound right and didn't make sense. :P

As far as the requirements for QNECs and QMACs being 100% vested when contributed to the plan is concerned, that appears to be correct per Code Sections 401(k)(2)(B) and ©, Code Section 401(k)(3)(D), and Treasury Regulation Section 1.401(k)-6. The Alert Guideline that Don Kieffer referenced specifies that forfeitures cannot be used as QNECs and QMACs because such contributions were not fully vested when made to the plan. That same Alert Guideline states that ADP Test Safe Harbor contributions are QNECs or QMACs. It then specifies that the ADP Test Safe Harbor contributions must be immediately nonforfeitable. This also appears to be correct per Code Section 401(k)(12)(E).

Bottom line: QNECs and QMACs can't be funded with forfeitures. ADP Test Safe Harbor Contributions are QNECs or QMACs. Therefore, ADP Test Safe Harbor Contributions can't be funded with forfeitures.

I don't think anyone is arguing with this reasoning (or maybe they are - there were a couple thousand people at the conference, so many, many different opinions are possible); I think the quibble is with the determination of WHEN the contribution is made. Clearly, when the monies that resulted in forfeitures were contributed to the plan, they were not fully vested. Don Kieffer made exactly this point when he addressed the issue of forfeitures and discussed the fact that, by definition, forfeitures could not have derived from a fully vested contribution. (Tom, I believe this is what you were referring to in your reply when you questioned whether this point was discussed one way or the other, so I believe in fact the forfeitures issue was discussed in this context by the panelists at the Q&A.)

Obviously, if the Safe Harbor contribution, by virtue of being reduced by forfeitures, is going to have the determination date of WHEN the contribution was made date back to the date on which the contribution giving rise to the forfeiture was made, then no employer contribution that is required to be fully vested when made can EVER be reduced by forfeitures. But WHY must the determination date back to the characterization of the monies in their original incarnation in the plan? Why couldn't one say that the Safe Harbor contribution is being made to the plan now for the current plan year, and that the amount of such contribution will be reduced by existing forfeitures held in the plan, which NOW, WHEN the Safe Harbor contribution is made to the plan, are characterized as a fully vested contribution? In other words, WHEN the Safe Harbor contribution was made to the plan, it was immediately nonforfeitable. The fact that the dollar amount of such contribution was made up by new employer monies and old forfeiture monies should not change the fact that WHEN the Safe Harbor contribution was made, it was fully vested as required under the Code and Regulations.

Second bottom line: It is clear from both the IRS Q&A session and Alert Guideline that the IRS is looking back to the dawn of time to determine the characterization of the monies when they first hit the plan, and using that determination of the characterization to determine whether reduction of an employer contribution is permitted. It is equally clear that some practitioners disagree with this approach and believe the determination should be made on the basis of when the contribution to be reduced is made, not when the amounts used to reduce such contribution were made. However, as Tom pointed out, despite the unofficial nature of the comments, the IRS must have thought about its response to the question ahead of time and had some sort of internal discussion on the issue, so we must accept that this is the IRS' position on this matter. For now.

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PiggyBank

I think your comments have been very good, certainly helpful. a lot of the stuff in the regs doesn't make sense, but we live with it.

I know Mr Cline as well, consider him a good friend (or at least 'comrade' in the pension industry), I may perhaps disagree with the IRS position on this one but not to the extent he does.

again, I think it boils down to making a statement "Forfeitures can be used to reduce any contribution and therefore that overrides the QNEC requirement that they be 100% vested when made to the plan" as opposed to "QNECs must be 100% vested when made, therefore the statement that forfeitures can be used to reduce any contribution must be modified to say 'except QNECs' or something similar.

one sesion I sat in on mentioned that a new EPCRS is coming out shortly, that it is in the final stages.

I see that BNA says the following

Employers will no longer be permitted to use forfeitures, or nonvested amounts left in employee accounts, for correcting certain kinds of retirement plan qualification errors, an IRS official says. Forfeitures can be a source of qualified nonelective contributions for some corrections but not others, IRS's employee plans voluntary compliance program coordinator says. IRS will clarify the differences in its next revenue procedure on voluntary corrections, Avaneesh Bhagat says.

it will be interesting to see which QNECs (at least in the context of 'corrections') forfeitures can be used.

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When you produce a non-sensical result, you are wrong. The result of the current interpretation is non-sensical. If you have forfeitures, they must be allocated (suspense account) at year end. If the plan has become a safe harbor plan, and there are forfeitures from previous contributions, consider this - for a $0.50 forfeiture allocation to a person in a plan which otherwise satifies safe harbor (deferrals and safe harbor only) triggers a Top Heavy contribution, this result is non-sensical, and therefore the conclusion is wrong.

Sal was much, much more polite in discussing this with Rhonda, and promised to put the arguements in writing to her. Since she was apparently a TPA in a prior life, reaching such a conclusion disturbs me.

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ok -I'm confused. <_<

I don't understand what the method of "funding" the Employer's safe harbor contribution has to do with the fact that the safe harbor contributions are 100% vested when made to the plan?

Safe harbor contributions are always 100% vested regardless of how the Employer funds them.

What am I missing?

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Call me crazy, but do I not have a favorable opinion on my prototype which calls for using forfeitures to reduce the safe harbor? Hooray for the IRS discovering this ridiculous nuance in the law, but it's just too late. They should have thought of that before they gave me a favorable opinion letter.

And for crying out loud, who's making the decisions on this type of stuff? What bothers me the most is that it is such an indirect "stretch" interpreation (even if it is a literal interpretation) that has really dramatic implications for these top heavy SH plans. So either choose to interpret it differently, or change the reg.

Interstingly I was talking to a higher up at a big document provider on a totally unrelated issue and expressed my hope that one day the IRS would provide clarification on that unrelated issue. The higher-up said it's not always wise to push them for a "ruling" because you won't always like the answer (i.e., no answer was better than a bad answer). Boy does that apply here...

Austin Powers, CPA, QPA, ERPA

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Call me crazy, but do I not have a favorable opinion on my prototype which calls for using forfeitures to reduce the safe harbor? Hooray for the IRS discovering this ridiculous nuance in the law, but it's just too late. They should have thought of that before they gave me a favorable opinion letter.

Thank you! Faced with a choice to follow the terms of the IRS approved document, or follow their recent Q&A I'll follow the document.

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Of course, in just over a year (by 1/31/2012) the new DC prototype/volume submitter documents will be going to the IRS for approval. It's not unheard of for the Service to no longer accept/approve plan provisions that were commonly approved in prior documents, so stay tuned.

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What if the forfeitures are a result of a correction?

One of the most common errors that we see is a payroll clerk who continues making deposits for someone who has either lowered their deferral election or terminated employment. These amounts were generally deposited as fully vesting money types (deferral or safe harbor match) but must now be forfeited. The argument that they cannot be used for safe harbor contributions because they were not deposited as fully vested in the first place now becomes rather convoluted.

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And, to me, it doesn't make sense that dollars in an account have a vesting associated with them, rather than the account itself.

If I put $1,000 in for Susie's PS in 2005 and she leaves right away and there is $1,010 forfeited. I don't understand why those dollars I put in and the naive earnings dollars (how did they know they wouldn't be considered fully-valued money?) couldn't be used later for whatever purpose. If anything, I'm "upgrading" those dollars from second-class, vestable citizens to Alpha Citizens being 100% vested after being applied for Safe Harbor.

Plus, you'd think the IRS would be all on board for this, as it would mean more revenue, because the ER doesn't take a deduction for the re-use of the forfeiture money, yet it would take a deduction when it has to take the money from its own coffers.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Lady MacDuff:

the issue as best put is as follows:

ee 1 safe harbor account $500

ee 1 profit sharing account $1000

ee 1 is 0% vested and is paid out $500 and forfeits $1000.

so now, can the $1000 in forfeitures be used to fund next year's safe harbor?

one argument is no, because safe harbors must be 100% vested when contributed to the plan. well, it does say they have to be 100% vested - you can't argue that point. (QACAs are an exception).

so, in my opinion, it hinges on 'forfeitures can be used to reduce contributions, does that mean any contribution and therefore overrides the 100% vested rule when made to the plan provision.

....................

as to the argument 'my document says I can, the IRS already approved it, so....

I recall the first safe harbor documents we had, all said that the plan would be safe harbor if it provided the safe harbor notice. They also had IRS approval, but this was changed shortly because it's the document that drives the safe harbor not the notice.

we shall see what comes of all this.

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And what happens if someone gets over-matched for Safe Harbor or gets too much SHNEC?

I would always suggest the extra gets forfeited. Would I not be allowed to use that money to offset future Safe Harbor contributions?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Guest PiggyBank
I don't understand what the method of "funding" the Employer's safe harbor contribution has to do with the fact that the safe harbor contributions are 100% vested when made to the plan?

Safe harbor contributions are always 100% vested regardless of how the Employer funds them.

What am I missing?

pmacduff, the IRS is saying that if you use forfeitures to reduce the employer's Safe Harbor contribution to the plan, then, since the original monies that gave rise to the forfeitures were not immediately nonforfeitable when they were contributed to the plan, you have not met the Safe Harbor requirement that the Safe Harbor contribution be 100% vested WHEN MADE. In other words, the IRS actually IS looking at the employer's method of funding the Safe Harbor contribution, and, according to the IRS, the monies used for such purpose must never derive from a contribution that was not immediately 100% vested when it was first made to the plan.

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Guest PiggyBank
And what happens if someone gets over-matched for Safe Harbor or gets too much SHNEC?

I would always suggest the extra gets forfeited. Would I not be allowed to use that money to offset future Safe Harbor contributions?

BG5150, I seem to recall the IRS panelists saying something about that at the Q&A. I think they didn't consider those to be quite the same thing as forfeitures, since the amounts are only "forfeited" due to a reason other than vesting. Also, applying the "100% vested when made" test would indicate that those Safe Harbor over-matches or excess SHNECs were indeed 100% vested when made to the plan, so one would think that would pass muster and could be used to offset future Safe Harbor contributions.

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Putting too much money into someone's account and then taking it out is not a forfeiture. It might wind up in spreadsheet column labeled "forfeiture" but it's not.

As for the rest of this discussion, as has been noted already, most documents explicitly permit the use of forfeitures to reduce most or all types of contributions. If they don't like it, they can change it the next time master documents are submitted for approvals. I think the "new" group of IRS panelists needs a little more experience and they are, effectively, thinking out loud and maybe even stating what they personally think "should" be rather than what the law and regs allow.

Ed Snyder

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Wouldn't it be reasonable to say that a contribution is made to the plan when it is allocated to someone's account? That if hundred dollar bill serial number xxxxxxxxxxx was originally put into the plan (say on January 1, 2009) as a non-safe harbor employer discretionary contribution, then if something happens and that account is forfeited in January 2011, why shouldn't that $100 be considered to be MADE as a contribution in 2011 when reallocated?

Something about the idea that "those dollars are tainted and cannot be used towards safe harbor contributions because they were not fully nonforfeitable when they were first put into the plan" strikes me as sophistry.

Or is it basically required that forfeitures under a 401(k) plan operate to increase participant account balances?

Always check with your actuary first!

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