Forfeiture Acct Use to Pay Lost earnings

[Guest mxmast]

Client failed to withhold deferrals from an ee's pay. Will now be making up the missing deferrals following one of the EPCRS self-correction methods. The plan allows forfeitures to be used to reduce employer contributions and QNECs are listed as Employer Contributions. So, the QNEC contribution will come from the forfeiture account. The question is: can monies in the forfeiture account also be used to cover the lost investment earnings that need to be credited to the deferrals? Or would this be considered a prohibited transaction?

[Alf]

The goal is to put the plan back in the same position as if the error had not occured, so it is ok as long as forfeitures are not reallocated.

[Demosthenes]

The Employer has to put the plan back in the same place it would have been had the error not occurred. What you are proposing has the Plan bearing the brunt of the Employer's error. In this context, corrections are not contributions. IMHO, this is absolutely a prohibited transaction.

If it wasn't, Company's could just pocket the deferrals and draw down the forfeitures account.

[Blinky the 3-eyed Fish]

I think that on its face it is appropriate to use the forfeitures to reduce the QNEC deposit. Whether the forfeiture is reducing an employer profit sharing contribution an employer matching contribution or this QNEC, the fact remains it is reducing an employer contribution. The reasons for the QNEC are irrelevant to me as is the concern that it would draw down the forfeiture account. The bottom line is the forfeiture is going to reduce a contribution in the first place, so why not the QNEC?

[Guest svatty]

In its most recent Q&A with the IRS, the ABA and its Joint Committee on Employee Benefits, asked the IRS this exact question. The IRS provided in Q&A 75 that forfeitures may be used to fund a QNEC in this situation.

Q&As

[jquazza]

The question is not whether forfeitures can be used to fund the QNEC, the question has to do with made up earnings. IMO, you can't. Your document says you can use forf. to reduce contributions, fine, QNECs are contributions, earnings aren't.

[Blinky the 3-eyed Fish]

How are you going to make up the earnings without it being a contribution? The QNEC is making up both the missed deferrals AND earnings. A QNEC is a contribution. I see no problem here.

[Kirk Maldonado]

Isn't there an issue regarding whether the plan is being operated in accordance with its terms unless the plan specifies that forfeitures can be used in this manner?

It seems to me that saying that forfeitures can be treated as employer contributions is not the same thing as saying that the employer can use forfeitures to correct breaches of fiduciary responsibility that it committed.

Isn't the question as to whether that would be a prohibited transaction under the jurisdiction of the DOL (and not of the IRS) pursuant to Reorg. Plan No. 4 of 1978? (I honestly don't know the answer to that one; I've not looked at that document for years.)

Given that the DOL has stated the plan assets can't be used to pay the fees associated with its corrective programs where there has been a breach of fiduciary responsibility, it seems doubtful that the DOL would approve the use of plan assets to fix this problem.

My guess is that this question will be directed to the DOL in next year's Q&As with the ABA. Until we get a response from the DOL, I would be very reluctant to rely on that Q&A. But I recognize that others have a greater risk tolerance level than I have.

[Blinky the 3-eyed Fish]

Since the first post spoke of how the document read, I presume that issue was reviewed.

As for any possibility of it being a prohibited transaction or impoper on any level, maybe I am just dense, but how can that be even a consideration? If forfeitures reduce the employer contribution, the only beneficiary of the forfeiture account is the EMPLOYER. The participants have no economic benefit if there was $100 in forfeitures or $1,000,000. Therefore, if the account is used to reduce the match, PS, QNEC, whatever, it is just saving the EMPLOYER some cash.

[R. Butler]

Since the first post spoke of how the document read, I presume that issue was reviewed.

As for any possibility of it being a prohibited transaction or impoper on any level, maybe I am just dense, but how can that be even a consideration? If forfeitures reduce the employer contribution, the only beneficiary of the forfeiture account is the EMPLOYER. The participants have no economic benefit if there was $100 in forfeitures or $1,000,000. Therefore, if the account is used to reduce the match, PS, QNEC, whatever, it is just saving the EMPLOYER some cash.

I tend to agree, whether or not the employer applies forfeitures to gain at this time or uses it reduce a future contribution, the ultimate result will be the same. I just don't see it as that significant of an issue.

[mbozek]

Isnt this question a 0 sum game for participants? The choice for the er is between contributing the earnings to the plan as a contribution and lowering future contributions or using the forfeitures to pay for the earnings and making a larger contribution to the plan which will be alocated with the remaining forfeitures to participants. In other words if the lost earning are 1k the er can contribute 1k now and reduce the next plan contribution by 1k. Or 1k in the forfeiture account will be allocated among the participants and the employer will include a 1k contribution to the plan for the current year.

[Guest KFM]

mbozek:

But what if it is a frozen money purchase pension plan (so that there will be no future employer contributions)?