Avaneesh Bhagat EPCRS Presentation

[Guest GreenERISA]

I want to be sure I am reading this correctly-I understand that this does not constitute the official stance of the IRS-but in a presentation on EPCRS, Bhagat clarifies the policy on using forfeitures to fund QNECs for purposes of making corrective contributions. Scenario is that ER failed to w/hold EE deferrals on two forms of "extra" payments, one of which was a bonus payment. The plan uses SH match to be a SH 401k.

Would you agree, based on the excerpt below, that the client can use Plan forfeitures to offset the OOP expense for the QNEC corrective contributions, so long as the QNEC is 100% vested and subject to the distribution restrictions? (I should also point out that the failure only affects one ER in a Plan which covers several ERs-so even if my suspicion is accurate-that they can use forfeitures-those are Plan assets and the fact that they are used to help out one of the ERs makes no difference w/r/t the other ERs?)

"Shifting gears again, this one relates to the use of forfeitures to make corrective QNCs. The question is, can a plan use forfeitures to make qualified non-elective contributions for correcting a failed ADP test? In the past we've been guilty of allowing the use of forfeitures, especially in plans where the plan provides that the forfeitures are used to reduce employer contributions.

Let's suppose your plan fails the ADP test and an employer contribution is required to fix it, we in the past used to say, well, since the plan provides that forfeitures are used to reduce employer contribution requirements why not use the forfeitures as a source of funding of the qualified non-elective contribution. As long as at the time the money hits the participant's that the participant is fully vested we should be good. The employee's been made whole and you're complying with the requirements of the ADP test.

However, it was later on pointed out to us that if we take that approach we're violating a regulation because if you look at the regulations for the definition of qualified non-elective contribution it basically says that the qualified non-elective contribution should come from non-elective contributions that satisfy the vesting and the distribution requirements in the 401(k) at the time the contribution was made to the plan. Since generally forfeitures are derived from contributions that were not fully vested when made, forfeitures cannot be used to satisfy that QNC requirement to correct a failed ADP test without violating a regulation.

One of the correction principles is that you don't want to implement one fix that causes a violation of another code or regulation requirement. So basically our stand is, after being made aware of this regulation, is that for purposes of correcting a failed ADP test if you're using QNC to fix it, the monies for the QNCs can't come from forfeitures.

Now, to make an area of distinction, though, and by the way, that clarification will also be made in the next revenue procedure -if you have an excluded employee problem and you want to use forfeitures to fund the QNCs required to replace the missed deferral opportunity of an excluded employee, there because that's more of a revenue procedure fix as opposed to a regulation required fix, we would permit the use of forfeitures to provide for the employer contributions required to correct an excluded employee problem. So, no for the correction of the ADP test; yes for correction of the excluded employee problem. "

[Guest Multi Lawyer]

I was curious as to where you came down on this question as I have a very similar issue. While the informal guidance would suggest that you are correct, the Bhagat presentation did speak to just "excluded employee problems" as opposed to isolated missed deferrals for employees who have otherwise been included in the plan. That distinction shouldn't matter, but without any formal guidance, I'm not sure you can comfortably conclude that you could use forfeitures to correct for one-off missed deferrals.

I want to be sure I am reading this correctly-I understand that this does not constitute the official stance of the IRS-but in a presentation on EPCRS, Bhagat clarifies the policy on using forfeitures to fund QNECs for purposes of making corrective contributions. Scenario is that ER failed to w/hold EE deferrals on two forms of "extra" payments, one of which was a bonus payment. The plan uses SH match to be a SH 401k.

Would you agree, based on the excerpt below, that the client can use Plan forfeitures to offset the OOP expense for the QNEC corrective contributions, so long as the QNEC is 100% vested and subject to the distribution restrictions? (I should also point out that the failure only affects one ER in a Plan which covers several ERs-so even if my suspicion is accurate-that they can use forfeitures-those are Plan assets and the fact that they are used to help out one of the ERs makes no difference w/r/t the other ERs?)

"Shifting gears again, this one relates to the use of forfeitures to make corrective QNCs. The question is, can a plan use forfeitures to make qualified non-elective contributions for correcting a failed ADP test? In the past we've been guilty of allowing the use of forfeitures, especially in plans where the plan provides that the forfeitures are used to reduce employer contributions.

Let's suppose your plan fails the ADP test and an employer contribution is required to fix it, we in the past used to say, well, since the plan provides that forfeitures are used to reduce employer contribution requirements why not use the forfeitures as a source of funding of the qualified non-elective contribution. As long as at the time the money hits the participant's that the participant is fully vested we should be good. The employee's been made whole and you're complying with the requirements of the ADP test.

However, it was later on pointed out to us that if we take that approach we're violating a regulation because if you look at the regulations for the definition of qualified non-elective contribution it basically says that the qualified non-elective contribution should come from non-elective contributions that satisfy the vesting and the distribution requirements in the 401(k) at the time the contribution was made to the plan. Since generally forfeitures are derived from contributions that were not fully vested when made, forfeitures cannot be used to satisfy that QNC requirement to correct a failed ADP test without violating a regulation.

One of the correction principles is that you don't want to implement one fix that causes a violation of another code or regulation requirement. So basically our stand is, after being made aware of this regulation, is that for purposes of correcting a failed ADP test if you're using QNC to fix it, the monies for the QNCs can't come from forfeitures.

Now, to make an area of distinction, though, and by the way, that clarification will also be made in the next revenue procedure -if you have an excluded employee problem and you want to use forfeitures to fund the QNCs required to replace the missed deferral opportunity of an excluded employee, there because that's more of a revenue procedure fix as opposed to a regulation required fix, we would permit the use of forfeitures to provide for the employer contributions required to correct an excluded employee problem. So, no for the correction of the ADP test; yes for correction of the excluded employee problem. "

[Tom Poje]

in the most recent LRM dated 2011 for plan documents (LRM=Listing of required modifications FOR DOCUMENTS)

the whole LRM can be found at http://www.irs.gov/retirement/article/0,,id=97182,00.html

in 3 different spots there are notes about forfeitures/QNECs, (so again, this does not appear to be the opinion of one individual or unofficial stance0

[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.]

[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).]

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.]

[Guest Beneflaw]

in the most recent LRM dated 2011 for plan documents (LRM=Listing of required modifications FOR DOCUMENTS)

the whole LRM can be found at http://www.irs.gov/retirement/article/0,,id=97182,00.html

in 3 different spots there are notes about forfeitures/QNECs, (so again, this does not appear to be the opinion of one individual or unofficial stance0

[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.]

[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).]

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.]

I'm not following-the above would appear to be (somewhat) in contradiction to the presentation. Possibly I am simplifying too much, but the way I see it-if the corrective contribution is being made to fix non-discrim failure, then you CANNOT use forfeitures to offset the QNECs. However, if the QNEC is being used to fund the corrective contribution for an otherwise eligible employee's missed deferral opportunity (be it for failure to enroll on a timely basis or in GreenERISA's scenario, because the appropriate definition of compensation resulted in a one time missed deferral opportunity (i.e., their regular deferrals were taken out of pay, but not on these special payments)), I think you can use the forfeitures.