Clarification on forfeitures included or not in ADP/ACP test?

[Guest Kim S.]

Hello, new to the board as far as posting, not new to the industry. My understanding of allocating forfeitures are they are included in total allocation for the 415 test but they are not shown on the ADP/ACP test as an employer contribution because it is not new money to the plan.

This plan I'm working on says the forfeitures are "added to the employer matching contribution". Specific reg I can refer to would be great!

[Disco Stu]

The answer depends on the method used to allocate the forfeitures. If the forfs are allocated based on compensation, then no, they would not be included in the ACP test.

If the forfs are contingent on making a salary deferral (i.e. allocated in the same proportion as the matching contribution) then the forfeitures should be included in the ACP test.

In my experience, the second approach is fairly uncommon, but check your plan document. The plan doc will also likely have some guidance about performing ADP/ACP tests. Although I didn't trudge through it, I would imagine that Treas. Reg. 1.401(m) would have some guidance here as well.

[Blinky the 3-eyed Fish]

I have several plans in which the forfeitures are added to the match. I have always included the additional match in the ACP test, as I see no difference in it's characterization.

Your reasoning that it is not new money to the plan is inconsistent with (a)(4) testing of the nonelective contribution. In that case, the forfeitures would be included most definitely.

Sorry, I don't have any cites for you.

Edit - I noticed you had responses from 2 Simpsons characters. Next will be Chief Wiggum.

[Guest Kim S.]

The adoption agreement states that forfeitures are first used to pay administrative expenses. Then, "Except as otherwise provided below with respect to Forfeitures attributable to matching contributions, any remaining forfeitures will be added to any employer matching contribution and allocated as an additional matching contribution".

In my years of working benefit plans, the forfeitures have either been used to reduce future contributions or pay expenses incurred by the plan. So again I know this forfeiture gets added to the 415 test but did not think it was included in the ADP/ACP.

[Medusa]

Disco Stu is right, the cite is in 1.401(m)-1(f)(12).

[Guest RJM]

I was checking the testing on one of these last week where the Plan failed ADP miserably (only 1 HC and 11 NHC), and also failed the MUT. Correcting just the ADP still didn't solve the MUT failure.

A substantial amount of match applied to the Excess Contributions to be refunded. Those were forfeited. Of course, the plan reallocates Forfeitures as additional match, except the HC is out of this '2nd' forfeiture allocation. Seems like a pretty convuluted means of disposing forfeitures.