Forfeitures to Fund QNECs for Missed Deferrals plus gains

[legort69]

 Can a forfeiture account be used to fund QNECS that cover a lost opportunity to defer (plus gains)?  

 

I am aware that testing corrections can be funded from forfeitures, but i was looking for clarification or consensus on QNECS to cover LOTD.

 

One other hanging question.... For missed matches, are they included in the ACP, posted as a QNEC/QMAC,  or  can it be a non-elective subject to the same vesting as the match source?

 

 

 

 

 

[M.S. Hatlee QPA, QPFC]

The final regulations in this area simply changed one element of the definition of QNECs and QMACs. Old definition...QNECs and QMACs had to be 100% vested when contributed. New definition...QNECs and QMACs have to be 100% vested when allocated. It is this change that now allows forfeitures (which, by definition, were not 100% vested when contributed) to be used to offset QNECs and QMACs.

So, the answer to your first question is "Yes". Any QNEC, including those necessary to correct certain operational errors under EPCRS, can be offset by forfeitures.

Regarding your second question I am going to assume that you are referring to the employer match that an employer must make when a participant has a lost deferral opportunity in a plan that provides for an employer match. Per the EPCRS (Rev. Proc. 2019-19) APPENDIX A section .05, these matching contributions are also made in the form of a QNEC not a QMAC. APPENDIX A section .05 also makes it clear that correcting for a missed deferral opportunity (deferral and match) occurs after other qualification requirements are met (i.e. ADP/ACP tests) and that the ADP/ACP tests may "disregard the employees who were improperly excluded."

So, the answer to your second question is 1) the QNECs necessary to correct a missed deferral opportunity and the associated match are not included in either the ADP or ACP test, 2) since the corrective contributions have to be made as QNECs they must be 100% vested and cannot be subject to a vesting schedule and 3) the earnings are part of the QNECs and, therefore, the employer can use forfeitures to offset them.

Michael Hatlee, QPA, QPFC

[legort69]

Thank you Michael. I skimmed through Appendix A and B of 2019-19 and was only able to glean that a missed match based on a MDO is funded as a corrective non-elective contribution.  I was not able to pin down the Q+NEC for missed match.

[BG5150]

The match is NOT a QNEC.  It stays on a vesting schedule (if there is one).

The correction for deferrals is a QNEC b/c deferrals are 100% vested automatically (like the QNEC).  The ER is not punished my having the match correction 100% vested, too.

[M.S. Hatlee QPA, QPFC]

BG5150 - Thank you for your response. It is indeed true that APPENDIX A refers not to a QNEC but rather to a "corrective employer non-elective contribution" in reference to contributing the match associated with a missed deferral opportunity. I appreciate you setting me straight!!

My apologies to legort69.

 

[M.S. Hatlee QPA, QPFC]

One clarification which may or may not apply to legot69's situation. If the plan is a safe harbor plan that uses a matching contribution to satisfy the safe harbor requirement, and the plan fails to implement an affirmative election, then I believe the contribution to make up for missed match must be a QNEC. 

[legort69]

Client had a follow up..... Lets say the plan had a match cap of $2,000. 

There are missed deferrals and match.

Would the corrective contribution for the missed match be included in this cap? 

My response was  'no' since the corrective match is a NEC.

Just want to run it by the pros on this forum.

 

[M.S. Hatlee QPA, QPFC]

So, this is obviously not a SH plan. This means, as BG5150 pointed out, that the match associated with the missed match opportunity is not a QNEC - just a regular match. Accordingly, I believe the match associated with the missed deferral opportunity would count towards the $2,000 limit. 

[legort69]

Quote

 that the match associated with the missed match opportunity is not a QNEC - just a regular match. 

This is the statement that I am getting hung up on.  With respect to a match cap of $2000, if the missed match is a NEC then is it still included in the 2k limit?

[M.S. Hatlee QPA, QPFC]

The following quote comes from an IRS publication explaining and providing examples of plan corrections. I have emphasized the sections that directly addresse your question, since the rest of the example is a tad bit complex:

On January 1, 2010 Jane, an NHCE became eligible to participate in the Vinco 401(k) Plan, a calendar year plan. However, Jane was not given the opportunity to make elective deferrals until April 1, 2010. Jane elected to defer 25% of her $80,000 2010 plan compensation. In 2010 the ADP for the NHCE group was 8%. Vinco made a 10% matching contribution on deferrals up to a maximum of $1,600. During the period from April 1, 2010 through December 31, 2010 Jane deferred 25% x 60,000, or $15,000. Her deemed deferral for the 3 month period of exclusion, on which the corrective matching contribution is calculated, is 8% x $20,000 or $1,600. However, the 402(g) limit for 2010 is $16,500. Thus, only $1,500 of the deemed deferred amount for the brief period of exclusion is used to compute the corrective matching contribution. The 10% match for the portion of the year when Jane was allowed to make elective deferrals (April 1-December 31) totaled $1,500. The 10% match on the $1,500 deemed deferral (taking into account the 402(g) limits) for the period of exclusion is $150. However, the plan provides a $1,600 cap on matching contributions. Thus, Vinco is only required to make a $100 corrective matching contribution, together with earnings. 

Based on my previous understanding, which (oddly enough) seems to be supported by this example provided by the IRS, I would say that the corrective matching contribution (not NEC) associated with the missed deferral opportunity would be combined with the other matching contributions allocated to the participant for the same plan year and that sum would be subject to the $2,000 plan limit.

So, for example, assume your participant received $1,800 in employer match due to deferrals he made in the period when he was given the opportunity to defer AND your correction calculation indicates that a corrective matching contribution of $450 is due to the participant based on the period during which he did not have an opportunity to defer, then the corrective match would be reduced to $200 to keep the total match at the $2,000 plan limit.

If you would like a copy of the IRS publication I am referring to, let me know and I will get it to you.

[legort69]

Thank you MS Hatlee. This is perfect and i was able to find in the IRS by searching on "Vinco" in a Google search. See below.

In summary, although a missed match based on missed deferral is a NEC, it still would be counted as a contribution for purposes of the match limit ( both plan imposed or max comp).

https://www.irs.gov/pub/irs-tege/epcrs_401k_phoneforum_presentation.pdf