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Proposed Regs for definition of QNEC and QMAC


Kevin C
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Scheduled to be published tomorrow.  Looks like we can go back to using forfeitures to fund safe harbor contributions, as long as your plan allows it.  Fortunately, our VS document has the phrase "unless provided otherwise under IRS guidance" at the end of the sentence about not using forfeitures towards SH contributions.

https://www.federalregister.gov/documents/2017/01/18/2017-00876/definitions-of-qualified-matching-contributions-and-qualified-nonelective-contributions

 

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Explanation of Provisions
After consideration of the comments described in this preamble in the
“Background” section, the Treasury Department and the IRS are proposing to
amend §1.401(k)-6 to provide that amounts used to fund QMACs and QNECs
must be nonforfeitable and subject to distribution restrictions in accordance with
§1.401(k)-1(c) and (d) when allocated to participants’ accounts, and to no longer
require that amounts used to fund QMACs and QNECs satisfy the
nonforfeitability and distribution requirements when they are first contributed to
the plan.

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Proposed Effective/Applicability Date
These regulations are proposed to apply to taxable years beginning on or
after the date of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register. Taxpayers, however, may rely on these
proposed regulations for periods preceding the proposed applicability date. If,
and to the extent, the final regulations are more restrictive than the rules in these
proposed regulations, those provisions of the final regulations will be applied
without retroactive effect.

 

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RCline - I sent a query to FIS on this, and if they respond to me prior to doing a general release, I'll let you know. I'm thinking the current language in the VS (in AA format, at least) would allow it. It refers to contributions that must be 100% vested pursuant to the Code when contributed. But the Code/Regulations will be modified to say 100% when allocated, rather than contributed. So I THINK it'll work. But we'll see once we actually get the IRS guidance, and confirmation from FIS. 

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Tom, even the IRS didn't realize the implications of what they had done in the regulations until after the EGTRRA pre-approved documents had been approved.  So, most, if not all, of the EGTRRA documents allowed the use of forfeitures towards safe harbor contributions, QNECs or QMACs.  Our document provider took the position that because the Opinion letter covered that provision, it could be used until the plan was restated for PPA. The IRS made everyone change their PPA documents to say forfeitures could not be used towards QNECs, QMACs or SH.   Fortunately, our PPA VS document anticipated that the IRS might change their mind. 

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On 1/17/2017 at 0:51 PM, Kevin C said:

Proposed Effective/Applicability Date
These regulations are proposed to apply to taxable years beginning on or
after the date of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register. Taxpayers, however, may rely on these
proposed regulations for periods preceding the proposed applicability date.

So we can rely on the proposed reg with respect to 12/31/2016 year end plans if the document allows for it.

What about a plan that does not allow for it because the PPA language did not anticipate the IRS change of heart.  Could a January 20, 2017 amendment be applicable to the 12/31/2016 plan year?

 

 

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If you don't think your document allows you to use the new rule, you should ask your document provider.  It's something they should be looking at now, anyway. If the document language is a problem, you can ask them if that is something that can be fixed retroactively with an interim amendment.  Our VS document language is clear, so I haven't gone down that road. 

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5 minutes ago, Kevin C said:

If you don't think your document allows you to use the new rule, you should ask your document provider.  It's something they should be looking at now, anyway. If the document language is a problem, you can ask them if that is something that can be fixed retroactively with an interim amendment.  Our VS document language is clear, so I haven't gone down that road. 

Thanks.  I went over the FTW VS Document and I'm pretty sure it requires an amendment as it appears they did not draft the document to be flexible in case the IRS changed their minds.

I spoke to FTW support and they said they were reviewing the guidance and will send out a technical release in a few weeks...

Edit:  If anyone else uses FTW documents it may speed things up if you submit a support ticket asking for speedy guidance.  The more the merrier right :)

 

 

 

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My question on this is:  Let's say you're funding the 2016 Safe HArbor today. Can you use forfeitures today? 
You have until 12/31/2017 to adopt this kind of a discretionary amendment.  But does it apply to when the contribution is funded or when it is accrued?  I think that is a critical question that perhaps is not explicitly addressed. 

And if that is the case I'm using the interpretation that works best for my clients!

Austin Powers, CPA, QPA, ERPA

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When did the plan first restate for PPA? Then look at your basic document. It probably says that that starting with the first plan year after the PPA restatement is first executed, that forfeitures cannot be used for allocations of QNECs, QMACs, or safe harbor.  If that is in there, with no additional clause added like "unless otherwise allowable", then your plan won't let you use the proposed regulation language until you amend the document since you must follow the terms of the plan. Yes, your plan can be more restrictive than the rules would allow.

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What does the plan say?  Our VS document says you can't use forfeitures for SH contributions unless provided otherwise in IRS guidance.  With that language, I feel comfortable using forfeitures towards 2016 SH.

The new guidance also gives me more comfort in our decision prior to our PPA restatements to rely on the EGTRRA Opinion letter and use forfeitures towards the SH contribution. We restated all our SH plans effective 1/1/16 because of this issue. 

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Here is what mine says:

Quote

Effective for Plan Years beginning after the Plan Year in which this Plan document is adopted, Forfeitures may not be used to reduce Employer contributions which are required pursuant to the Code to be fully Vested when contributed to the Plan (such as QMACs, QNECs and "ADP test safe harbor contributions" other than QACA "ADP test safe harbor contributions").

I'm using the forfeitures in 2017!  I think there is room for interpretation.  The language was just not specific to my question, I don't think.,

Austin Powers, CPA, QPA, ERPA

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22 minutes ago, austin3515 said:

You have until 12/31/2017 to adopt this kind of a discretionary amendment.  But does it apply to when the contribution is funded or when it is accrued?

Other threads on BenefitsLink have me befuddled about the meaning of the word "accrue"

For my personal edification, would you please 'splain what "accrued" means in your sentence?

Thanks.

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Just an FYI:  Our version (major modifier) of the Relius VS says (paraphrasing) forfeitures may not be used to offset contributions that must be non-forfeited when contributed - which in my mind says since the safe-harbor contribution per this guidance no longer needs to be non-forfeitable when contributed but only when allocated, we can do this - BUT it goes on to say "such as" QNECS, QMACS and a few other things (not including safe harbor contributions).  I read that as examples that under this guidance are no longer applicable, and therefore superfluous (and not limiting the preceeding clause).  Relius' preliminary answer is that they think an interim amendment is necessary.

We also support the off the shelf ASC document, which indicates it's not allowed" "unless" further regulatory guidance permits it - so that document appears ready at this time.

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MoJo - my initial impression is the same as yours, but I got the same initial response from FIS that you did. Perhaps they are just being very cautious, at least for now - I don't know. But I'm sure they will be doing some sort of release explaining their position. We are using the VS document in AA format.

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12 minutes ago, Belgarath said:

But I'm sure they will be doing some sort of release explaining their position. We are using the VS document in AA format.

Yes, they've indicated further guidance to us as well - but we already have clients (through their advisors) wanting to consume forfeitures sooner rather than later.  We also have an AA version of the VS.

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14 hours ago, austin3515 said:

Johnny has comp of $100,000 in 2016.  the Plan includes a 3% Safe Harbor Nonelective.  Johnny ACCRUES a benefit of $3,000 during 2016.  His employer FUNDS the benefit that accrued in 2016 during 2017.

Thanks, Austin.  That makes sense.

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FT William has

 

Effective for Plan Years beginning after the adoption of the 2010

Cumulative List (IRS Notice 2010-90) restatement, forfeitures cannot be used as Qualified Non-Elective Contributions, Qualified

Matching Contributions, Elective Deferrals, or ADP test safe harbor contributions (Code section 401(k)(12)).

 

so we have a question in to them how they will handle.

I'm certainly expecting some sort of amendment of some type.

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42 minutes ago, Tom Poje said:

FT William has

 

Effective for Plan Years beginning after the adoption of the 2010

Cumulative List (IRS Notice 2010-90) restatement, forfeitures cannot be used as Qualified Non-Elective Contributions, Qualified

Matching Contributions, Elective Deferrals, or ADP test safe harbor contributions (Code section 401(k)(12)).

 

so we have a question in to them how they will handle.

I'm certainly expecting some sort of amendment of some type.

FTW just responded to my request from yesterday with the following

1. Does the FTW document allow for us to use forfeitures for SH contributions in light of the proposed rule?
ANSWER:  No
2. If it does not, will we be able to to tack on an amendment to allow us to do so for the 12/31/2016 plan year?
ANSWER:  No.  This regulation did not make the changes until 2017 so this can only be applied prospectively.
3. if so, when can we expect such an amendment? Since CPAs are already beating down our door for 2016 numbers, we need guidance on this ASAP.
ANSWER:  We will be releasing an email soon with more details so please watch for that communication.


 

 

 

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Ahh, but what do you do for a 6/30 year-end? That is the million dollar question!We use Relius and I like the interpretation displayed above (i.e. the refrence to "contributed" has been obsoleted by the new guidance), and for me I think it's enough to get me there for 2016 and any plan year ends between now and when I get my hands on the amendment.  Be curious to see if Relius addresses this.

Austin Powers, CPA, QPA, ERPA

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Just now, austin3515 said:

Rather be Golfing, is there a dislike button on these boards anywhere? :wacko:  I think its possible that there would be different interpretations personally, but lets see. Leave it to the IRS not to address the most glaring question.

LOL if so can I dislike my own post?  Im not sure I agree with FTWs interpretation as to applicable plan years

 

 

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