Forfeitures cannot be used for QNEC's, what about safe harbor contributions?

[Sully]

During the recent IRS phone forum that dealt with EPCRS the presenter stated that forfeitures could not be used to make QNEC’s for correcting a failed ADP test. This was because Reg 1.401(k)-6 requires that the QNEC come from nonelective contributions that satisfy vesting (100%) and distribution requirements under 401(k) when contributed to the plan. Forfeitures are derived from contributions that were not fully vested when made so they cannot be used.

Does anybody think this interpretation could also be applied to employer 401(k) safe harbor contributions? Would employers not be allowed to use forfeitures to fund the SHNEC or SHMAC?

[rcline46]

Note the presenter was speaking ONLY about corrections under EPCRS. I do not see any restriction on using forfeitures for QNECS, SHNECS or SHMACs on a current basis, not could there be restrictions since forfeiture money is employer money. It has no 'vesting' or any taint applied to it.

BTW, in the past we have used forfeitures to satisfy employer contributions and the IRS approved it.

[Guest Sieve]

rcline -- Forfeitures may come from employer contributions, but forfeiture money is not employer money any longer. If SH contributions have to come from contributions that are fully-vested when made, and if that's the IRS interpretation of the language in the regs, then why would there be a difference, in the IRS' eyes, between use of forfeitures in EPCRS correction and use of forfeitures in self-correction?

[rcline46]

Forfeiture money can be used (according to docs and LRMs) for anything an employer contribution can be used. Ok, so it is 'plan' money, but there is no restriction on its use. I would even fight the IRS on its use in EPCRS.

[Sully]

I checked with the IRS agent on this and he was kind enough to send this response:

You would need to determine whether the definition of QNEC in 1.401k-6 applies to the term used in the safe harbor reg. Generally, unless otherwise provided, the definitions in 1.401k-6 apply to the entire 401k regulation. If that general rule applies here, you wouldn't be able to use forfeitures to make the safe harbor QNEC.

Not sure where this will end up. I know most of the plan documents out there already allow you to use forfeitures to reduce safe harbor contributions.

[austin3515]

Corbel's prototype very clearly states that employer contriubtions can be used to offset safe harobr contriubtions. In fact, in order to avoid the top-heavy minimum, this absolutely must be an option (especially for SHMAC plans).

[Tom Poje]

but its also true that years ago (many) the fail safe language in their documents said you could pass either either ratio percentage or avg ben test, and this was later changed to ratio percentage only.

also, years ago, many documents (not just Corbel) contained language for safe harbor 401(k)s implying it was driven by the safe harbor notice and the IRS made such language be removed, so I would be careful about making a blanket statement....

[austin3515]

But since we have a favorable opinion letter regarding the language, would it not be prudent to rely on that opinion letter?

[Bird]

But since we have a favorable opinion letter regarding the language, would it not be prudent to rely on that opinion letter?

Yes, but it's not like it's something that got approved accidentally. As noted by rcline in the first response, the IRS speaker was talking about a QNEC to correct a filed test under EPCRS, not the 3% safe harbor. I've never like calling the SH a QNEC, but the IRS does in the regs, so we get this kind of confusion.

[austin3515]

Yes, but it's not like it's something that got approved accidentally.

That's my point, though? So it makes perfect sense to rely on it?

If anyone out there does not believe it is OK to use forfeitures to offset the SH, please let us know!! Tom, did I read into your comments correctly that perhaps you might believe we cannot use forfietures for safe harbor contributions?

[Tom Poje]

well, based on the comments above, it sounds like forfeitures shouldn't be used to fund QNECs (and as a result, safe harbors)

so how do you handle things when you have a pre-approved document?

of course, there is nothing requiring you to do so, but of course if pinching every penny makes a difference tehn it is understandable one may want to do this.

best I can say is I submitted a question for the ASPPA Conference. they usually meet sometime in September, hopefully they haven't metyet and this one will be discussed.

I believe in the past, the IRS attutude was they wouldn't push the issue if you did it in the past, but I am not sure on that.

[austin3515]

So Tom -

SH Match Plan in a fast food chain. 20 out of 120 people eligible choose to defer (4 of them are the owner and family who max out k every year). During the Plan Year, $4,000 of forfeitures occurred from some old profit sharing money. They can't be used to reduce the SHMatch, so your position is that the Plan (which is top-heavy) now has to allocate out $4,000 to 120 people, which by the way blew your top-heavy exemption, and now the plan must allocate a 3% top-heavy minimum?

If what you're saying is true, than the above scenario is inevitable for many plans across the country, isn't it? Should we discontinue our top-heavy plans with the safe harbor match as a precaution against this clearly devestating possibility?

I know you are only interpreting what others have said above, but it is so potentially earth shattering an interpretation it just seems like it shouldn't be possible...

[rcline46]

The Corbel documents clearly have a choice to use ANY forfeitures to be applied to any Employer contribution including ADP test safe harbor contributions. Since these are approved documents the IRS cannot go back on the approval.

If this option was chosen you have the choice of some IRS off the cuff comment being law and you have a failure to follow the document - big oops, or following the document.

Remember the original comment was regarding an EPCRS correction and I would agree with the IRS - stick it to the employer who messed up and not allow forfeitures to be used for corrections. I do not think in any fashion this applies to normal plan operation.

[Tom Poje]

but any safe harbor plan that has the possibility of forfeitures has that potential problem. I believe the most common recomendation was to pay plan expenses first from forfeitures.

hopefully this topic will be discussed or explained in greater detail at the ASPPA conference. then we can find out if it is simply one IRS agent's opinion, if its a matter of technically thats what the regs say but we wont pursue it, etc. I could see Craig Hoffman arguing this one and ending up with the "we agree to disagree" response.

[rcline46]

I went back and read the original post. That agent is/was flat out wrong! IMNSHO. I choose to ignore his comment completely. A forfeiture does not belong to anyone, it is just money in a plan until allocated to a source and then takes on the the nature of that source.

[Tom Poje]

I see this issue is to be discussed during the Q and As at the ASPPA Conference. I have an earlier flight so will miss it, so hopefully someone else will report back what has been said.