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


Guest Pennysaver
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when the $100 was made to the plan the first time, it was considered a contribution and therefore deductible. but once it becomes a forfeiture, its not deductible a second time, so maybe that's the distinction.

(In addition, in the case of a leveraged ESOP, providing you meet certain conditions, it doesn't count as an annual addition, so there are differences between forfeiture and a contribution)

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Generally, monies can't be put in a plan in year X and not allocated until year X+1. And again, if you put money into a safe harbor account and "something happens" to make it be removed, it is NOT a forfeiture. It's a red herring, as far as this discussion goes.

Ed Snyder

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  • 5 months later...
Guest Not such a bad guy
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.

......

Wrong, QACA's are the safe harbor auto arrangment, therefore they are subject full vesting, ACA's and EACA's are not safe harbors.

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  • 3 months later...
Guest PiggyBank

FYI for those following this issue:

The IRS Q&A session on July 27th at the Western Benefits Conference addressed this question again, and reiterated that forfeitures may not be used to reduce salary deferrals, safe harbor contributions, QNECs and QMACs. There was a little more discussion between Ilene Ferenczy and Martin Pippin (IRS) regarding QACA and the fact that QACA can be subject to a vesting schedule, ending with Martin saying something to the effect that he would have to look further at that. There was a comment from the panel that a future IRS FAQ may address and clarify this issue. I presume we must stay tuned.

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FYI for those following this issue:

The IRS Q&A session on July 27th at the Western Benefits Conference addressed this question again, and reiterated that forfeitures may not be used to reduce salary deferrals, safe harbor contributions, QNECs and QMACs. There was a little more discussion between Ilene Ferenczy and Martin Pippin (IRS) regarding QACA and the fact that QACA can be subject to a vesting schedule, ending with Martin saying something to the effect that he would have to look further at that. There was a comment from the panel that a future IRS FAQ may address and clarify this issue. I presume we must stay tuned.

I have no issue with forfeitures not offsetting salary deferrals, but the rest of their current stance is just stupid. It's a way to increase administrative headaches without actually accomplishing anyting.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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I have no issue with forfeitures not offsetting salary deferrals, but the rest of their current stance is just stupid. It's a way to increase administrative headaches without actually accomplishing anyting.

Tell us how you really feel, Bill! :blink:

Not to mention that many approved plan documents have language providing that forfeitures may reduce "Employer Contributions" without any further language limiting what sorts of "Employer Contributions" may be reduced.

I'm addicted to placebos. I could quit, but it wouldn't matter.

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I have no issue with forfeitures not offsetting salary deferrals, but the rest of their current stance is just stupid. It's a way to increase administrative headaches without actually accomplishing anyting.

And, if anything, it is a revenue GAIN for the IRS (using forfs for SH, QNEC), as Employers deduct less.

QKA, QPA, CPC, ERPA

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

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Also no word on the fact that they may forcing plans to blow their top-heavy exemption (especially SH Match plans) because they are required to allocate the forfeitures (and now the plan does not consist solely of SH and 401k). Especially plans that do not allow the payment of expenses from forfeitures.

Stupid Stupid Stupid. And that is how I really feel. They're going to have to wait until the PPA documents before I pay any attention.

Austin Powers, CPA, QPA, ERPA

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Often people looking for advice on a matter here ask for code and reg citations.... would sure be nice if the Service would provide the code and reg basis for their conclusions. If their logic is as flawed as "forfs came from non-vested sources so therefore cannot go to immediately vested sources" then I'd like a target we could actually shoot at.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Often people looking for advice on a matter here ask for code and reg citations.... would sure be nice if the Service would provide the code and reg basis for their conclusions. If their logic is as flawed as "forfs came from non-vested sources so therefore cannot go to immediately vested sources" then I'd like a target we could actually shoot at.

Reg 1.401(k)-6

Qualified nonelective contributions (QNECs). Qualified nonelective contributions or QNECs means employer contributions, other than elective contributions or matching contributions, that, except as provided otherwise in § 1.401(k)–1© and (d), satisfy the requirements of § 1.401(k)–1© and (d) as though the contributions were elective contributions, without regard to whether the contributions are actually taken into account under the ADP test under § 1.401(k)–2(a)(6) or the ACP test under § 1.401(m)–2(a)(6). Thus, the nonelective contributions must satisfy the vesting requirements of § 1.401(k)–1© and be subject to the distribution requirements of § 1.401(k)–1(d) when they are contributed to the plan.

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Guest Pennysaver

Does anyone know if they addressed this issue again at the 2011 ASPPA Annual Conference in Maryland last week?

Also, if the IRS position is that forfeitures cannot be used to reduce QNECs, then why is it that Section 6.02(4)© of Revenue Procedure 2008-50 states that "Corrective allocations should come only from employer nonelective contributions (including forfeitures if the plan permits their use to reduce employer contributions)." Isn't the explicit approval by EPCRS of the use of forfeitures to fund a corrective QNEC allocation in direct conflict with the reasoning put forth by the IRS commentators in the IRS Q&A's at the 2010 ASPPA Annual Conference and the 2011 Western Benefits Conference?

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The issue is that QNEC's must satisfy THIS requirement included in 401(k)(2)©

© which provides that an employee's right to his accrued benefit derived from employer contributions made to the trust pursuant to his election is nonforfeitable, and

I think the latter part of this sentence is irreconcilable with a QNEC, since a QNEC is NOT made pursuant to "his election." What's more, it is found in the 401k section of the code. to me, the clear and obvious point of referencing 401(k)(2)© was to make the QNEC 100% vested. Any other extrapolation is just nonsensical.

Worst policy decision I've ever seen, and I'm taking gap income into account!

Austin Powers, CPA, QPA, ERPA

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the response at this years conference is no different (despite arguments from ASPPA)

Q and A 21

IRS response. The IRS believes that safe harbor contributions under IRC section 401(k)(12) are required to be

nonforfeitable when made to the plan. This is because Treas. Reg. section 1.401(k)-3 refers to safe harbor

nonelective contributions as qualified nonelective contributions and to safe harbor matching contributions as qualified

matching contributions, and Treas. Reg. section 1.401(k)-6, in defining those terms, requires that such contributions

meet the nonforfeitability requirement at the time contributed to the plan. A forfeiture used to fund such a contribution

would fail to meet this requirement, because it is attributable to a contribution that was not forfeitable when

contributed to the plan. The IRS takes a different position with safe harbor contributions under a qualified automatic

contribution arrangement (QACA), pursuant to IRC section 401(k)(13), because such contributions do not have to be

nonforfeitable at the time they are contributed.

ASPPA Comment. We disagree with the IRS' response. This position seems to be an unnecessarily narrow interpretation of

the regulatory language. The reference in the regulations to the time contributed to the plan instead could be

interpreted as prohibiting an employer from making contributions to a participant’s account that later become vested

(e.g., amending the plan to eliminate the vesting schedule) and then characterizing such previously-allocated

contributions as a safe harbor contribution, QNEC or QMAC. When forfeitures are used to reduce employer

contributions, they are simply acting as a proxy for the employer’s current contribution. The focus on nonforfeitability

for a safe harbor contribution, QNEC or QMAC should be when the contribution is allocated (i.e., contributed) to the

affected participant’s account. This interpretation is further supported by the statutory language. IRC §401(k)(3)(D)(ii),

which defines QNECs and QMACs, refers to the vesting rule under IRC §401(k)(2)©, which simply focuses on

nonforfeitability with respect to the participant’s accrued benefit derived from such contributions, not whether the

source of such contributions are current employer contributions or forfeitures. IRC §401(k)(12)(E) makes a similar

reference with respect to the vesting requirement for safe harbor contributions.

I would also note that the IRS response would have been made before the new LRMs were released at the start of October. But the LRMs also support their position.

3 times (not just once, but count 'em, 3 times) they tell you...

(recall that the regs clearly indicate that a safe harbor is a QNEC)

p. 14

[Note to reviewer: The blank space in the preceding paragraph should refer to the Plan's forfeiture provisions applicable to employer contributions other than Elective Deferrals and Qualified Nonelective Contributions. In the alternative, a sponsor may provide for specific forfeiture language applicable only to Matching Contributions. Note that forfeitures cannot be used as Qualified Nonelective Contributions, Qualified Matching Contributions or Elective Deferrals.]

p. 23

[Note to reviewer: Forfeitures cannot be used as Qualified Nonelective Contributions, Qualified Matching Contributions or Elective Deferrals. For Plan Years beginning after 2005, matching formulas, other than those above, such as flat-dollar or ones that target matches at lower paid Non-highly Compensated Employees, must satisfy additional requirements specified in Regulations § 1.401(m)-2(a)(5).]

p.36

(b) ACP Test Safe Harbor Matching Contributions will be vested as indicated in the adoption agreement, but, in any event, such contributions shall be fully vested at normal retirement age, upon the complete or partial termination of the Plan, or upon the complete discontinuance of employer contributions. Forfeitures of nonvested ACP Test Safe Harbor Matching Contributions will be used to reduce the Employer's contribution of such ACP Test Safe Harbor Matching Contributions.

[Note to Reviewer: Other language specifying the use of such forfeitures may also be acceptable. However, forfeitures may not be used as ADP Test Safe Harbor Contributions, and if used as anything other than ACP Test Safe Harbor Contributions, the Plan will not be exempt from Code § 416.]

the LRM is called

Cash or deferred arrangement (CODA) of Required Modifications Information package found at

http://www.irs.gov/pub/irs-tege/coda_lrm1011.pdf

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Guest Pennysaver

Thanks, Austin and Tom.

So..... in light of the most recent Q&A and the recently issued CODA LRM's, is there any way to reconcile the contrary instruction in EPCRS? I believe I heard that a revised EPCRS will be published in the near future; it will be interesting to see whether the statement from Rev. Proc. 2008-50 permitting the use of forfeitures to reduce the corrective QNEC allocation remains in the revised EPCRS.

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It was addressed at the Annual Conference Q&A session. The IRS did not change their position. The only saving grace I see is that they are saying while forfeitures can not be used to reduce an ADP SH contribution, they can be used to reduce an ACP SH contribution. That should give us a way to avoid having the forfeitures blow up the top-heavy exemption for SH plans. If the IRS position doesn't change before then, with the next restatement, every SH plan will need to have a discretionary ACP SH match.

It was pointed out during the Q&A session that is it possible to have forfeitures from a SH contribution account and even a deferral account of a missing participant. The IRS would not answer when asked if forfeitures of amounts that were 100% vested when deposited could be used to reduce ADP SH contributions. There was enough uproar over this at the conference, that I don't think we've heard the last of it.

I think the IRS will claim this is consistent with their EPCRS guidance because of the caveat "if the plan permits their use to reduce employer contributions". They will say that with ADP SH contributions, the plan can not provide that forfeitures reduce employer contributions. Of course, they rarely let logic stand in their way when they prepare their guidance.

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LEt's hope the same thing happens to this that happened to gap-period income...

And in my opinion, the ability to use the forfeitures for the discretioinary matches is of little consolation, although it helps. There will be plans that do not include the option for any additional matches, and there will be plans that do not allow forfeitures to be used for expenses. For those plans to be forced into a top-heavy minimum just because they had a bad TPA is absolutely unfathomable. But that is absolutely going to happen at least often.

And I just dread telling a cash strapped client that they can't use forfeitures to reduce their already generous contribution. That will go over real well...

Austin Powers, CPA, QPA, ERPA

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I know I'm being thickheaded - but that this is even an issue (funding safe harbor with forfeiture $$) has continued to baffle me. <_<

The safe harbor contributions are 100% non-forfeitable when contributed/allocated.

Past forfeitures are simply being used to "fund" the safe harbor contribution.

Someone else once mentioned - isn't this a good thing for the government because it actually reduces the Employer's deductible amount, thereby (in theory) increasing the Employer's tax liability?

"can't fight city hall"

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Guest Pennysaver
I think the IRS will claim this is consistent with their EPCRS guidance because of the caveat "if the plan permits their use to reduce employer contributions". They will say that with ADP SH contributions, the plan can not provide that forfeitures reduce employer contributions. Of course, they rarely let logic stand in their way when they prepare their guidance.

I don't know how the EPCRS caveat "if the plan permits their use to reduce employer contributions" could ever provide consistency between the IRS' position and the EPCRS provision; the CODA LRMs specifically state that forfeitures cannot be used as QNECs, so how could a plan possibly permit the use of forfeitures to reduce a corrective QNEC allocation for purposes of EPCRS?

If the IRS' position is correct, then an employer would never be able to utilize forfeitures pursuant to Section 6.02(4)© of Rev. Proc. 2008-50 (EPCRS). It will be very interesting to see if that same provision is available in the next version of EPCRS.... If it isn't, then at least the IRS would be consistent (although not necessarily right). If it is, then I foresee many, many more arguments on this subject.

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You are overlooking one small detail. The EPCRS section you cite referencing forfeitures being used in a correction does not mention QNEC's. It says "corrective allocations" and not all "corrective allocations" are QNEC's. I don't see anything in EPCRS that specifically says forfeitures can be used to reduce a corrective QNEC. But, I think it implies that you can.

Rev. Proc. 2008-50, Section 6.02(4)© Corrective allocations should come only from employer nonelective contributions (including forfeitures if the plan permits their use to reduce employer contributions).

If you look at Appendix A, .05(1), corrective allocations of employer contributions (other than match) are not QNEC's.

They go on to describe corrective allocations of missed deferrals as a QNEC, which I understand. Then, they describe a corrective allocation of a missed match as a QNEC, which is just plain stupid. The idea of a correction is to restore the plan to where it should have been, which should include the vested balances. I hope the IRS doesn't really want a corrective match to go in a 100% vested QNEC account. But, that's probably a question we are better off not asking.

I don't expect the new EPCRS Rev. Proc. to clarify this. Of course, that is IF it ever gets released. The main reason for the update was to add plan document corrections for 403(b)'s.

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