Exclusion of Eligible Participants

[oldman]

We have a client who excluded eligible employees from participating in the plan since July of 2011 to present date. The exclusion of these eligible participants from contributing salary deferral contributions and receiving employer matching contributions would be considered an operational error and the plan sponsor should correct the error as soon as possible using a reasonable correction method that would place affected participants in the position that would have been in had there been no operational defect. Under Revenue Procedure 2008-50, the correction for a failure to include an eligible employee in a 403(b) plan is based on the "missed deferral opportunity" to make deferrals. Under the correction method, the plan sponsor would make a qualified nonelective contribution (QNEC) to the plan on behalf of the excluded employees for their "missed deferral opportunity". The QNEC for the missed deferral opportunity is equal to 50% of the employee's "missed deferral". In addition, the plan sponsor would be responsible for making matching contributions for the excluded employees equaling the matching contributions that would have been would have received had the employees made pre-tax contributions. However, the corrective matching contributions would be based on the full amount of deferrals and not the 50 percent lost opportunity applicable to employee deferrals.

Question is can the plan sponsor use plan forfeitures to fund the QNEC and matching contributions?

[Guest GeerTom]

This depends on the plan documents.

Some plan documents say forfeitures are used to reduce employer contributions, which QNECs and matches certainly are. If so, you're fine.

Some documents say forfeitures are used to make additional allocations or are tossed into a pool allocated as an employer base contribution or discretionary match, in which case the documents need to be amended (subject to whatever anxiety you may have about TAM 9735001).

Some documents, for reasons I have never understood, say forfeitures are allocated or offset based on the source of the forfeitures, almost certainly requiring an amendment since the source of forfeitures will never be a QNEC.

Go look at the plan documents and see what they say, then make any needed amendments.

Tom Geer

[Kevin C]

Rev. Proc. 2008-50 Section 6.02(4)© Corrective allocations should come only from employer nonelective contributions (including forfeitures if the plan permits their use to reduce employer contributions).

[oldman]

This depends on the plan documents.

Some plan documents say forfeitures are used to reduce employer contributions, which QNECs and matches certainly are. If so, you're fine.

Some documents say forfeitures are used to make additional allocations or are tossed into a pool allocated as an employer base contribution or discretionary match, in which case the documents need to be amended (subject to whatever anxiety you may have about TAM 9735001).

Some documents, for reasons I have never understood, say forfeitures are allocated or offset based on the source of the forfeitures, almost certainly requiring an amendment since the source of forfeitures will never be a QNEC.

Go look at the plan documents and see what they say, then make any needed amendments.

Tom Geer

[oldman]

Thanks to both of you for your response. The plan document does provide that forfeitures will be used to offset future contributions.