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Under ERISA § 406 and Internal Revenue Code § 4975, what characterizes a prohibited transaction is that a person other than the plan has some use of money, rights, or other property that belongs to the plan’s trust. Your example suggests that the employer promptly segregated contribution amounts from the employer’s assets and promptly remitted those amounts to the plan’s trustee or its agent. That the plan’s administrator did not direct the trustee to invest according to the participant’s direction did not cause the employer (or another fiduciary or party-in-interest) to have any personal use of the plan’s assets. If so, a mistake within how the plan’s trust invests might not result in a prohibited transaction. If there is no prohibited transaction, neither an IRC § 4975 excise tax nor an ERISA § 502(i) civil penalty is owing.

Timely article that came out in ASPPA NET yesterday afternoon: Flexibility on the Use of Forfeitures—Not so Fast!! Lawsuit against Thermo Fisher. Document states that forfeitures can be used for expenses and to reduce contributions. Thermo Fisher opted use forfeitures to reduce contributions over a 6 year period, while also paying plan expenses from plan assets. Claims are breach of fiduciary duty and engaging in prohibited transactions. Dimou v. Thermo Fisher Scientific, Inc., S.D. Cal. No. 3:23-cv-01732 (9/19/2023)

IRS Publication 7335 (Rev. 6-2021) notes IV. Vesting Line a. Section 401(k)(2)(C) of the Code requires that elective contributions and other contributions that may be treated as elective contributions, as described in V. and VI. below, must be nonforfeitable when made to the plan. In order for a contribution to be nonforfeitable each participant, regardless of age or service, must immediately be vested in his or her elective contributions. 401(k)(2)(C) 1.401(k)-1(c) and 1.401(k)-1(c) says (c) Nonforfeitability requirements (1) General rule. A cash or deferred arrangement satisfies this paragraph (c) only if the amount attributable to an employee's elective contributions are immediately nonforfeitable, within the meaning of paragraph (c)(2) of this section, are disregarded for purposes of applying section 411(a)(2) to other contributions or benefits, and the contributions remain nonforfeitable even if the employee makes no additional elective contributions under a cash or deferred arrangement. (2) Definition of immediately nonforfeitable. An amount is immediately nonforfeitable if it is immediately nonforfeitable within the meaning of section 411, and would be nonforfeitable under the plan regardless of the age and service of the employee or whether the employee is employed on a specific date. An amount that is subject to forfeitures or suspensions permitted by section 411(a)(3) does not satisfy the requirements of this paragraph (c). This section factored into the change in the IRS position that allowed forfeitures to be used to fund QNECs and QMACs. The IRS previously said forfeitures could not be used to fund QNECs and QMACs since these amounts had to be 100% vested and would not give rise to forfeitures. Upon revisiting their logic, the IRS said forfeitures could be used to fund QNECs and QMACs because these contributions were employer contributions when made to the plan and QNECs and QMACs were not subject to a participant election as elective deferrals when made. This is a subtlety but the interpretation allowing the use of forfeitures for QNECs and QMACs was welcomed in the community. This new logic, though, is not applicable to using forfeitures to fund elective deferrals made at the election of a participant, i.e., reduce the amount of elective deferrals owed to the plan. Have employers done this? Very likely because no one told them they couldn't. Is it a failure to deposit deferrals timely? Yes. Could the forfeitures used in this manner be considered a pre-funding of elective deferrals? Could be. My take on all of this is if the employer asks if they can do this, just say no. If an employer is doing this, they should stop (and try to clean up the mess).

I expect formulating administrative policy is allowed without impacting the ability to rely on the opinion letter. As an example, many pre-approved plans have a check box that asks "Are Loans permitted: Yes/No". The Adoption Agreement then has an appendix or addendum titled Loan Policy with all of the details like number of loans, interest rate, refinancing... I would see a Forfeiture Policy statement to be analogous.

This case will be interesting. Before Cycle 3 restatements, pre-approved plan included provisions where the plan specified the sequence in which forfeitures would be applied, with one sequence applicable to forfeitures of non-elective employer contributions and another sequence applicable to forfeitures of matching contributions. For Cycle 3 pre-approved plans, the IRS approved language which pretty much said do what you want with the forfeitures as long as you use them before the end of the plan year following the plan year in which the forfeiture occurred (with some choices for doing so earlier). Plans commonly chose to use NEC forfeitures first to reinstate any forfeitures for rehires under the plan provisions, then to pay plan expenses, and then to allocate to participants using the plan's allocation formula (with allocating over compensation as the next best choice). Match forfeitures were required to offset the employer's match obligation which almost always depleted the match forfeitures. If in this case the plan had such provisions, then there should have been no discretion how to use forfeitures, or there was a failure to follow plan provisions. (Notably, a plan that allows for discretionary contributions provides an end-around to using forfeitures to offset the contribution. The employer declares the amount of the discretionary contribution with an eye on the total amount of contributions and forfeitures that are allocated to participants.) A plan document with the do-what-you-want provision essentially grants that discretion to a fiduciary as identified in the plan. This case sets up a conflict between exercising discretion granted in the plan document against always choosing what is the optimal use of forfeitures for the benefit participants. Charging plan-related administrative expenses to the plan has always been allowed and, where applied, has always had participants complaining about it. The counter argument boils down to employers are not required to sponsor a plan or pay the plan's administrative expenses, so why should they if they don't want to? With many states mandating some form of access to retirement plans and the federal government moving towards "encouraging" access, it may be possible that our future may include a mandate that the plan sponsor must bear at least some of the costs of plan administration (e.g., plan audit, retirement or RMD distributions, ...) One thing this case will do is having plaintiff's attorneys searching for plans (likely by reading audit reports downloaded from 5500 filings) that use forfeitures to offset plan expenses. We live in an interesting time with respect to retirement plans.

If, for an ERISA-governed retirement plan that provides participant-directed investment, the plan’s administrator did not follow the participant’s proper investment direction, a conscientious administrator should restore the participant’s account so it is credited with amount that would have resulted had the administrator promptly and correctly followed the investment direction. The administrator would credit the adjusted amounts to the participant’s selected investment alternatives in the proportions that would have resulted had the administrator promptly and correctly followed the investment direction. Ideally, the restoration should result in an account that, as nearly as possible, is what would result had no error happened. If the failure to implement the investment direction was the employer/administrator’s breach of its fiduciary responsibility, the administrator should pay the amount needed for the restoration. If the failure to implement the investment direction was the recordkeeper’s breach of its contract, the administrator should cause the recordkeeper to pay the amount needed for the restoration, to the extent the contract provides. If a participant sues to get the restoration, a court may award attorneys’ fees and costs. ERISA § 502(g), 29 U.S.C. § 1132(g) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1132%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1132)&f=treesort&edition=prelim&num=0&jumpTo=true. But one hopes the person that erred will simply own its error and make the account right.

So, first, this is a "firm" statement from the IRS of what they have been saying for some time - so the way we are interpreting this is "they mean it this time" especially since they've given the transition period (amnesty) to fix (certain) past sins. In other words, "fix it now, or if we catch you, you really going to get it this time ...." A problem, in our opinion, does exist with respect to the plan documents. Our document (prototype) has *always* said forfeitures must be used no later than the end of the year following the year in which incurred, and for those who have accumulated forfeitures (despite our constant nagging), we've advised them that a correction requires going year by year and reallocating forfeitures based on the year in which incurred. NOTHING we read in the proposed reg grants "amnesty" from having to follow the provision of the plan - and we doubt the IRS will allow you to ignore the plan provision in order to take advantage of the transition rule. We do have clients with individually designed plans, that don't say when forfeitures have to be used, so maybe they can take advantage of the transition rule. For now, we're advising our clients that "the IRS really really means it this time, so when we've told you in the past you had to do this, we believe you have to do this, or else!" I doubt many will pay attention, so we will be dealing with audit issues ultimately.....

I would assume you count all service unless the LTPT rule are different than the regular eligibility rules. The minimum age just keeps out someone who otherwise would have met the service condition but does yet met the age condition.

Effective date.

I agree that there is very little guidance/rules on what to do when investment directions are not followed, and whether a correction is made or determining the amount of the correction seems to be driven either by the plan administrator finding the error and calculating lost earnings or by the participant informally or formally requesting to be made whole. This situation is fairly common but does appear anywhere as a prohibited transaction. I find 1.415(c)-1(b)(2)(ii)(C) regarding restorative payments and what is or is not counted for purposes of applying the 415 limit illuminating even though this section, too, does not address a correction method: Restorative payments. A restorative payment that is allocated to a participant's account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan's losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). This includes payments to a plan made pursuant to a Department of Labor order, the Department of Labor's Voluntary Fiduciary Correction Program, or a court-approved settlement, to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). Payments made to a plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under title I of ERISA are not restorative payments and generally constitute contributions that give rise to annual additions under paragraph (b)(4) of this section. The focus of text in yellow includes recognizing a payment made to the plan to because of losses due to a fiduciary's failure to act and that failure creates a reasonable risk of liability. Put another way, if you think you're going to get sued, fix it and its not an annual addition. It is interesting that the text in green is added to cover a situation where the participant lost money due to market fluctuations and the fiduciary (out of the kindness of their heart I suppose) decides to put in a little something to make up for the loss. The participant making an investment decision that did not work our does not have a reasonable risk of liability, so any such restoration of the loss to the participant is an annual addition. We never know where we may find a little bit of guidance.

If the mistaken and selected investment alternatives all have daily prices, some recordkeepers will (at a customer’s request, and sometimes with an incremental fee) use system records and system or integrated software to generate the what-would-have-happened. Some of those generate an invoice for the restoration amount needed, and some also generate an instruction for the plan’s administrator to sign.

Your reading of the "one-to-one" correction method is right: QNECs can't be limited to NHCE's with account balances. As further bad news, the use of elective contributions to pass the ACP test is allowed only if the elective contributions are subject to the ADP test. Treas. Reg. §1.401(m)-2(a)(6)(ii). You could submit a VCP application requesting a different correction method. The IRS will consider other correction methods and might, under these circumstances, be amenable to allowing the plan to correct through qualified matching contributions, which would be allocable only to contributing NHCE's.

it falls under the same correction umbrella. It is a Failure to Implement a Deferral election. the IRS website is great. but best to go to the actual Revenue Procedure. https://www.irs.gov/pub/irs-drop/rp-21-30.pdf See Appendix A.

no ifs needs: let A1 = pay, let B1 = deferrals match = min(A1*.025, B1*.5) + min(A1*.015, B1*.5) use a round function on it, but that's messier to type out here. You essentially have 2 matches layered on top of each other. 50 percent on the first 5, plus 50 percent on the first 3.