Forfeitures and QNEC's

[Guest welcomehome]

I have a 401(k) plan that needs a QNEC. The Adoption Agreement states that Forfeitures are to be used to reduce any Employer Contribution. Can the forfeiture be used towards the QNEC? Any reason why not? Thanks for any guidance on this.

[Guest Bud]

I don't see why not. QNECs are employer contributions. Go for it.

[Guest etu22]

I also have a question on the forfeiture and how long do I have until I cannot use what is in the account towards Employer Contributions. For instance:

We have x$ amt in the forfeiture account from 2003 and can use it towards fees or Employer Contributions. I just completed my February Employer Match and would like to allocate the forfeiture funds to cover the Employer Match. However, since we will still have a balance in the forfeiture account afterwards, I'd like to use it again next month when I do the March Employer Match. Is this possible even after the first month or two of 2004 has gone by?

Also, the balance in our forfeiture account contains monies that were from 2002. Would I be able to use those monies for 2004 expenses as well?

Our client manager has given us information, but I'm still not comfortable with everything. I want something in writing from him as to the proper procedures and timelines, and I'm not getting that. it seems this is a gray area

Thank you for your help!

Elisa

[Kirk Maldonado]

Bud:

Are you troubled at all by the language in 1.4101(k)1-(g)(13)(iii) which provides (in relevant part):

nonelective contributions must satisfy the vesting requirements of paragraph © of this section * * * when they are contributed to the plan.

Literally interpreted, this language would seem to prohibit the use of forfeitures as QNECs because, by definition, forfeitures weren't fully vested when they were contributed to the plan.

[Guest Bud]

Kirk, I'm troubled by that language. I think it means when the forfeiture is used as a QNEC, it's 100% vested in the account of the participant who received the QNEC.

[Kirk Maldonado]

The IRS takes the position that this language precludes the plan from using forfeitures to fund QNECs, because those amounts were not fully vested when those amounts were originally contributed to the plan.

I believe that the IRS position is justified based upon the literal wording of the regulation. However, I don't think that position makes any sense from an overall policy perspective. Specifically, I don't see any potential for abuse.

I believe that the right result should be that, as long as the amounts are vested when they are reallocated as forfeitures, it should be permissible. But it takes some pretty creative reasoning to get to that result reading the wording of the regulation in the abstract.

This situation exemplifies why it is so important to carefully read the applicable wording of the plan document, statute, regulation, or whatever other language is pertinent to the issue at hand. That language may not have been drafted with your particular situation in mind, and even though it makes perfect sense in all other situations, it may produce an absurd result in your situation.