LRM's on SH's and Forfeitures

[austin3515]

Sungard's write-up:

http://www.relius.net/News/TechnicalUpdates.aspx?ID=588

"This week, the IRS released its List of Required Modifications for 401(k) plans. The LRM dealing with this issue includes the following note to reviewers: “Forfeitures may not be used as ADP Test Safe Harbor Contributions, and if used as anything other than ACP Test Safe Harbor Contributions, the Plan will not be exempt from Code §416."

To me this almost suggests that a plan using the 3% SHNEC (which is satisfying the THM anyway) COULD use forfeitures towards the SHNEC. Corbel doesn't seem to mention this though? Anyone have any thoughts on that?

[12AX7]

Would there be instances where the SHNEC would otherwise not satisfy the TH minimum, when 416 would apply? That could also be their thinking...

[Tom Poje]

I'm not sure I understand the reasoning.

The only amounts that can ever be used in the ADP have to be 100% vested, implying they are QNECs of one type or another.

(e.g. a SHNEC or a Basic Match)

A safe harbor match could be discretionary match meeting the 4% comp limit guidelines, which would never be used in the ADP test. The discretionary can be subject to vesting, thus it would make sense that forfeitures could be used as a safe harbor in the ACP test.

This all goes back to the issue "Can forfeitures be used to satisfy safe harbor?" and the IRS has made it clear they feel certain that since the regs say QNECs must be 100% vested when made to the plan, that forfeitures (which obviously result from contributions subject to a vesting schedule) do not meet this requirement.

based on the comments on the handout for IRS Q and A #21 for this year's annual conference it's worth the price of admission (hint: some folks at ASPPA disagree with the IRS position)

well, I won't be attending this year so I will miss that and have to wait to hear what other people say.

[austin3515]

Would there be instances where the SHNEC would otherwise not satisfy the TH minimum, when 416 would apply? That could also be their thinking...

There would but, the question is, is it an prohibition on using forfeitures for Safe Harbor? Or just tha tif you do CHOOSE to use them you need to do a THM. My point is just that the SHNEC will take care of most the THM anyway.

And Sieve, Corbel is saying that because we all have our opinion letters, that we can continue to use our documents as written. The new LRM's are really the first authoritative guidance released and will only affect the PPA docments in 2014.

[Tom Poje]

I remember many moons ago having a Corbel document with fail safe language that mentioned a plan could satisfy either ratio percentage or avg ben pct test, must have gotten past the reviewers, but eventually they had to modify that language, so this would not be the first instance in which approved document language had to be modified at a later date.

Austin - I think the position is no, you can't use forfeitures as a SHNEC, because a SHNEC is used in the ADP test. (Or at least, the IRS would prefer you don't do things that way.)- at least going forward, but what that date (or if enforcable) will be is hard to say.

[12AX7]

My point is that the SHNEC would not always otherwise satisfy the TH minimum where 416 would apply. This could happen where the eligible employee enters mid-year.

[austin3515]

This is Corbel's position, which I like much better

"The IRS has reviewed and approved these documents. Employers who properly adopt these documents are entitled to rely on those approvals. In part, this means that while the IRS could require prospective changes, it cannot retroactively disqualify the plan for failure to follow the law. That reliance should be valid until the employer restates for PPA on a prototype or volume submitter document that does not include the offset language. For prototype and volume submitter plans, the likely restatement time period will be between April 1, 2014 and April 30, 2016, but the IRS will announce the actual period closer to the time. "

[John Feldt ERPA CPC QPA]

A QACA SHNEC, when contributed, might not be 100% vested (QACA allows a 2-year cliff vesting schedule).

Does this mean the IRS thinks a QACA SHNEC forfeiture cannot be used to satisfy a QACA SHNEC, but instead must shift to some other type of contribution source? If so, what if there are no other contribution sources?

edit: typo

[Tom Poje]

just so everyone knows

the LRM is called

Cash or deferred arrangement (CODA) of Required Modifications Information package found at

http://www.irs.gov/pub/irs-tege/coda_lrm1011.pdf

3 times (not just once, but count 'em, 3 times) they tell you...

p. 14

[Note to reviewer: The blank space in the preceding paragraph should refer to the Plan's forfeiture provisions applicable to employer contributions other than Elective Deferrals and Qualified Nonelective Contributions. In the alternative, a sponsor may provide for specific forfeiture language applicable only to Matching Contributions. Note that forfeitures cannot be used as Qualified Nonelective Contributions, Qualified Matching Contributions or Elective Deferrals.]

p. 23

[Note to reviewer: Forfeitures cannot be used as Qualified Nonelective Contributions, Qualified Matching Contributions or Elective Deferrals. For Plan Years beginning after 2005, matching formulas, other than those above, such as flat-dollar or ones that target matches at lower paid Non-highly Compensated Employees, must satisfy additional requirements specified in Regulations § 1.401(m)-2(a)(5).]

p.36

(b) ACP Test Safe Harbor Matching Contributions will be vested as indicated in the adoption agreement, but, in any event, such contributions shall be fully vested at normal retirement age, upon the complete or partial termination of the Plan, or upon the complete discontinuance of employer contributions. Forfeitures of nonvested ACP Test Safe Harbor Matching Contributions will be used to reduce the Employer's contribution of such ACP Test Safe Harbor Matching Contributions.

[Note to Reviewer: Other language specifying the use of such forfeitures may also be acceptable. However, forfeitures may not be used as ADP Test Safe Harbor Contributions, and if used as anything other than ACP Test Safe Harbor Contributions, the Plan will not be exempt from Code § 416.]

...............

remember the original Safe harbor documents. they original put the safe harbor language in, and thought everything was driven by the notice, but the IRS put a stop to that, and I think most people followed the IRS desires until revised language came out.

now, does that mean you can follow Corbel's argument that since you have a document you can use forfeitures til the IRS puts a deadline on things?

probably.

of course I suppose that could raise an issue of 'ethics'....or put another way, irregardless if I did it in the past, could I do it at the moment

knowing what I know?

...........

as a side issue, the original Safe Harbor notice language almost implied these weren't QNECs or QMACs, but the new 401k regs definitely said they were.

IRS Notice 98-52

VIII Interaction with other rules and testing methods

D. Qualified Matching Contributions and Qualified Nonelective Contributions

To the extent they are needed to satisfy the safe harbor contribution requirement of section V.B, safe harbor matching and nonelective contributions may not be used as qualified matching contributions and qualified nonelective contributions, respectively, under any plan for any plan year. For example, if a plan satisfies the safe harbor contribution requirement using a safe harbor nonelective contribution by allocating a 7-percent safe harbor nonelective contribution to all eligible employees, contributions in an amount equal to the first 3 percent of each employee's compensation may not be used as a qualified nonelective contribution under the ACP test. However, safe harbor nonelective contributions in an amount equal to the remaining 4 percent of each employee's compensation may be used to satisfy the ACP test (subject to the requirements of section 1.401(m)-1(b)(5)).

The new 401k regs made it clear that for safe harbor “the employer is required to make a QNEC…at least 3%...” 1.401(k)-3(b)(1)

[austin3515]

I'm comfortable trusting Corbel. If they find out they're wrong, they'll let me know.

Practical question regarding their ridiculous provision:

-Plan is intended to be a SH Match plan, taking advantage of the TH Exemption.

-Plan has forfeitrues of old regular mach money of $1,500.

-Plan expense do not exceed $1,200 for the entire year.

-So now, there is $300 of forfeitures which must be allocated

-Plan document does NOT inlcude any additional discretionary match.

-There are 100 eligible employees not deferring.

In this situation, the $300 needs to be allocated out as profit sharing, and a top-heavy minium of 3% must be provided to the 100 non-deferring employees, right?

[12AX7]

Can you find another $300 of work to do for the client to avoid the TH allocation, which would likely cost more than that...?

[Tom Poje]

Austin:

what you point out is not so much a problem with the stance on forfeitures, but rather a problem with the top heavy rules in general.

why should an owner be penalized for deferring?

He sets up a deferral only plan so his employees can defer. but because he defers and there is little or no participation, he has to put in 3% for everyone because he deferred his own money. In fact doubly screwed if no one defers because now he gets a refund and still has to put in a top heavy.

or else, that is just poor plan design.

The same Corbel constantly has warned about having the possibilities of forfeitures ruining the top-heavy free status of a safe harbor plan. if there was a risk of having a minimal amount of forfeitures why not just amend and vest to 100%. that would be better planning.

I'd agree with the idea that if I had a minimal amount of forfeitures I'd find some plan expenses (even next year) to eliminate the nonsense.

[austin3515]

OF course I would never let my example happen in the real world. But the point is the forfeitures should be able to be used to offset the only contrbution that is intended. I mean really, what is the policy agenda being fulfilled here? Are the employees really being disenfranchised by using forfeitures to reduce the deposit required to fund an already generous benefit? I believe some version of my example is going to play out somewhere in this country, perhaps several times a year. And the outcome will be plan termination.

So I ask you, who does this serve? You know, you hear about all of these unfriendly business policies. This is such a perfect example of that. And unfortunately, it only imacts small businesses who don't donate enough to political campaigns to make a difference.

[austin3515]

PS - Anyone who posts on this message board as though their clients are not going to be infuriated about this policy doesn't have the same kind of cost-focused clients that I do. When I tell my client that they have a $30,000 safe harbor deposit, oh and by the way, they need to allocate an extra $7,500 in forfeitures as a matching contribution, they are going to go ballistic.

[K2retire]

The thing that makes no sense to me is the stance that it had to be 100% vested when deposited rather than when allocated as a safe harbor contribution. Perhaps my balance forward training is clouding my understanding of the issue, but until the money is allocated as safe harbor contribution, it shouldn't matter.

[austin3515]

It makes no sense to you because you are an intelligent person.

The issue is that QNEC's must satisfy THIS requirement included in 401(k)(2)©

© which provides that an employee's right to his accrued benefit derived from employer contributions made to the trust pursuant to his election is nonforfeitable, and

It's just an insane interpretation in my opinion, especially when condiered that it is a cross-reference to 401k!! So whoever drafted this section was thinking about 401k contrbiutions, NOT QNEC's. Whatsmore, a literal interpretation of this section is ridiculous because a QNEC is irreconcilable with the end of the sentence. A QNEC is not made pursuant to an employee's election. So I'm left with no other conclusion other than the IRS wants to make life more difficult for small business owners. The clear intent of the cross-reference was the nonforfeitability requirement. A logical persopn of sound mind could reasonably intepret this to apply to a QNEC contribution at the time of allocation. Sure someone else could reach a different conclusion, but it is encumbent upon rulemakers to consider the impact of their actions. I see so little of that from the IRS (or the DOL... no wait, especially the DOL) when making decisions.

[K2retire]

It makes no sense to you because you are an intelligent person.

I've long understood (and advised clients) that trying to figure out the logic behind IRS and DOL rules is an exercise in futility. And yet, I can't seem to stop myself....