Forfeitures and Safe Harbor Match

[imchipbrown]

Roughly sixty employee company, half of the eligible are deferring, 50% of first 5% match, bad ADP and ACP but not close to being Top Heavy.

A Plan is going to start Safe Harbor Matching in 2015 (Enhanced Formula). I'm designating that Pre-2015 matching accounts (non-safe harbor) remain subject to vesting. Forfeitures may happen after 1/1/2015 in these prior accounts. If the amount of forfeitures is greater than Plan expenses, it would be great if they could be used to fund (reduce) some of the Safe Harbor Match.

The document we use is from one of the big providers and an adoption agreement provision is "Forfeitures will be used in the following manner:" (check box) "Any permissible method (restore forfeitures, reduce Company contributions (or reallocate as Company contributions) made pursuant to Article 4 or to pay Plan expenses)".

In response to a query of whether the forfeitures could fund part of the Safe Harbor Match, the document provider said:

"There is nothing in the plan document that specifically prevents forfeitures to be used to fund safe harbor contributions but the IRS has noted verbally that they do not agree with that position and will be providing clarification in future regulations. At this point it is a plan by plan decision on if they want to proceed with using forfeitures to fund safe harbor contributions."

I'd prefer to

a) reduce (fund) the Safe Harbor contribution by the forfeitures,

b) If plan expenses could soak them up, I'd like pay then, or

c) allocate to those deferring in some proportion

Any experiences anyone would like to share?

[Lou S.]

The IRS position whether we like it or not is pretty clear that you cannot use forfeitures to fund any safe-harbor contributions (match or non-elective) and it is my understanding that language to prevent such "reallocation" had to be in PPA approved documents so after the effective date of your PPA restatements you can't do what you want.

In pre-PPA documents it is more of a gray area though your position may or may not hold up if a plan is audited.

If anyone had something more substantial to add I'd be curious though if you do a search on this topic I think you will find a number of past threads discussing just this.

[imchipbrown]

To clarify the discussion, this is a PPA-approved NS Prototype.

Trying to wrap my head around the IRS position, is it because the employer isn't feeling the full burden of the Safe Harbor commitment?

[chc93]

1. IRS position is because those non-safe harbor (discretionary) contributions were not fully vested when *paid* to the plan.

2. In one situation we had years ago, the sponsor decided to fully vest all previous non-safe harbor (discretionary) match and not worry about it... don't have to keep vesting, no forfeitures to worry about. (This was a small plan, so no real issues.)

[Lou S.]

The IRS position is that Safe Harbor contributions must be 100% vested when funded. Since forfeitures arise from contributions that were not 100% vested when funded they can't be used to satisfy safe harbor contributions.

At least that's my understanding of their position.

I have no idea why they took this position it seems to me a more reasonable approach would have been to say safe harbor contributions are 100% vested when allocated to a participant's account.

I'm also not sure what authority they have to support the position but unless someone is willing to challenge the position I think that is the rule we have in place.

[Tom Poje]

in the lrm (Listing of Required Modifications) the IRS clearly stated that forfeitures can't be used for QNECs, etc (which include safe harbor contributions) I believe the one exception are QACAs, which could have a 2 year cliff - the exception because QACAs are not 100% vested when deposited)
I realize people point to their document and say "But it says...."
but the IRS also has said we don't have to amend or restate a document every time there is a change, we only have to do that every six years as long as we are in compliance in operation. I would hold this is one such situation.

see the attached lrm, in particular page 16 of the pdf file (page 14 of the lrm)

..........
note: the language in the documents we are using for restaments is as follows

Effective for Plan Years beginning after the adoption of the 2010 Cumulative List (IRS Notice 2010-90) restatement, forfeitures cannot be used as Qualified Non-Elective Contributions, Qualified Matching Contributions, Elective Deferrals, or ADP test safe harbor contributions (Code section 401(k)(12)). Any such disposition of
forfeitures from a Participant's account shall be made no later than the end of the Plan Year following the Plan Year during which the
forfeiture occurred.

coda_lrm1011.pdf

[Bird]

The IRS position is that Safe Harbor contributions must be 100% vested when funded. Since forfeitures arise from contributions that were not 100% vested when funded they can't be used to satisfy safe harbor contributions.

That's correct. IOW, they are going back to look at the original (e.g. profit sharing) contribution and saying that since it was not 100% vested when made, it can't be used for SH. It makes sense in a "hypertechnical" way.

Honestly, from a policy standpoint, I kind of agree - the safe harbor should be something the employer is buying into to avoid testing, and just using money that's laying around in the plan from forfeitures is not exactly asking much of the employer. I just happen to be reading the GAC update in the Fall 2014 Plan Consultant from ASPPA and they (we) are still asking the IRS to reconsider; I say give it a rest - don't we have anything else to work on?!

Ed Snyder

[pmacduff]

I see your point Bird, but I do think this is an important issue and have many instances where safe harbor plans are probably never going to be making a disc. match or profit share contribution again. They have a proven track record to back that up of no match or ps in the last 5 or so years. It is illogical to me that those employers can't use forfeitures to help fund the safe harbor. Most of those forteitures will be used up anyway within a pretty short period of time. They are providing a guaranteed contribution to participants that is 100% vested, which in my mind can be a better benefit than the match or ps on a vesting schedule. Esp. in this day and age when many employees don't stay at the same place long enough to be vested.

my 2 cents.

[MoJo]

Rather interesting in today's Napa-net.org e-newsletter, there was an article about possible legislation to look for in 2015. One of the pieces of legislation discussed would specifically clarify and ALLOW forfeitures to fund safe-harbor contributions, leading credence to the IRS' interpretation that *currently* forfeitures may NOT be used for future safe-harbor contributions. The article is here:

http://www.napa-net.org/News/Browse-Topics/Inside-NAPA/Article/ArticleID/3765/Will-Retirement-Legislation-Get-a-Restart-in-2015

[John Feldt ERPA CPC QPA]

In one of the big provider's PPA document, it states that the effective date of the plan's inability to apply forfeitures to offset the employer safe harbor contribution is the first day of the plan year following the plan year in which the initial PPA restatement is executed (since a SH plan can't be changed mid-year). The plan has an IRS advisory letter. So, for those calendar year plans restating in 2016 before May 1, this provision is not effective until 1-1-2017 according to that plan's document.

[austin3515]

_{Honestly, from a policy standpoint, I kind of agree - the safe harbor should be something the employer is buying into to avoid testing, and just using money that's laying around in the plan from forfeitures is not exactly asking much of the employer. I just happen to be reading the GAC update in the Fall 2014 Plan Consultant from ASPPA and they (we) are still asking the IRS to reconsider; I say give it a rest - don't we have anything else to work on?!}

Shame on you Bird! This is the dumbest position I've ever heard of! It's a classic example of a solution in search of a problem that just did not exist. The employees get the safe harbor contribution. That's the only thing that matters.

[imchipbrown]

Lou S.

Digging through more of my provider's communications, I see they acknowledge the IRS position you referred to in post #2. Gold star! Everyone, see the Note (last paragraph below).

The forfeitures will leave the plan through payment of plan expenses the employer might have paid itself, or be reallocated in some way which will perhaps be subject to vesting again. Tom, couldn't the reallocation blow the Top-Heavy free pass?

The IRS stance makes zero sense to me.

From my document provider's communique:

Forfeitures and Safe Harbor Plans

Section 6.03(d) of the Basic Plan Document was modified from the EGTRRA version so that forfeitures cannot be used to fund safe harbor contributions. The IRS has long had the opinion that qualified nonelective contributions and qualified matching contributions allocations may not be funded with forfeiture allocations. Our EGTRRA document was approved without the restriction; however, for PPA the IRS is generally requiring all vendors to include the prohibition.

(d) Disposition of Forfeitures. Amounts forfeited from a Participant's Account shall be used to restore forfeitures or reduce Company contributions (or reallocate as Company contributions) made pursuant to Article 4, or to pay reasonable Plan expenses to the extent specified in the Adoption Agreement. Effective for Plan Years beginning after the adoption of the 2010 Cumulative List (IRS Notice 2010-90) restatement, forfeitures cannot be used as Qualified Non-Elective Contributions, Qualified Matching Contributions, Elective Deferrals, or ADP test safe harbor contributions (Code section 401(k)(12)). Any such disposition of forfeitures from a Participant's a ccount shall be made no later than the end of the Plan Year following the Plan Year during which the forfeiture occurred.

Note that we generally recommend making the restatement of safe harbor plans prospective to the extent possible to help ensure no modifications are made to the safe harbor plans mid-year. This change lends another reason to restate prospectively - to delay the prohibition on using forfeitures for safe harbor contributions.

[Tom Poje]

I think there are a number of reasons why people want to use forfeitures to cover safe harbor

1. document said yes/ always did it this way

to me, I think this is a carry over from when safe harbors were first started. Initially everyone thought you could have the language in the document, but unless you issued a notice the plan wasn't safe harbor (or something similar to that) there were lots of issues like that - e.g. discretionary match could have allocation conditions and still be safe harbor.) I think the idea of forfeitures is probably the last one to be cleaned up.

2.save money at the moment (it's all in the same bucket - eventually the employer will use up that amount so what difference does it matter) logically that makes sense, and since the IRS doesn't like leftovers, why not use up the amounts and be done with it

3. avoid top heavy issues. This is probably the most important, because yes, if you allocate them as an additional contribution you lose the monopoly card 'get out of top heavy free card', though I am not sure what % of plans this would really apply to.

[Bird]

The employees get the safe harbor contribution. That's the only thing that matters.

Sez who?

[austin3515]

^{The employee for starters. Economists for another.}

[imchipbrown]

From a boots-on-the-ground perspective, the particular employer informed me that the fund company fees were big enough to soak up the forfeitures. So I don't need to quadruple my fees

[MoJo]

"The employee for starters. Economists for another."

Sorry to play devil's advocate, Austin, but 1) if it's a safe harbor plan, the participants get the value of the safe harbor contribution regardless of the source (new employer money or use of forfeitures) - that's the nature of a SH plan; and 2) by NOT allowing the use of forfeitures to offset safe harbor contributions, the participants would get the benefit of the employer safe harbor contribution PLUS the value of the use of the forfeitures for some other purpose (offsetting expenses they wold otherwise have to absorb, funding or increasing other employer contributions - or simply reallocation to their accounts) and I assure you Economists would like that even more....

[austin3515]

Oh you can spin it any way you want, but you see my point. A dollar in your account is a dollar in your account. If there was hair brained public policy agenda to ban forfeitures from being used to offset ANY employer contributions, then sure everyone gets more money and the economists are happy happy happy. But that's not what's going on here. What's going on here is a silly nuanced ultra-literal interpretation of a vaguely worded reg and nothing more. It's a wholly manufactured burden on businesses (in particular small ones).

[MoJo]

Oh you can spin it any way you want, but you see my point. A dollar in your account is a dollar in your account. If there was hair brained public policy agenda to ban forfeitures from being used to offset ANY employer contributions, then sure everyone gets more money and the economists are happy happy happy. But that's not what's going on here. What's going on here is a silly nuanced ultra-literal interpretation of a vaguely worded reg and nothing more. It's a wholly manufactured burden on businesses (in particular small ones).

I don't necessarily see it as "silly." We can argue the value of the policy but as was mentioned above, the employer gets the benefit of the safe harbor - meaning happier HCEs and no testing complexity. If there isn't a "cost" to that, then it's a free ride - and I would suggest that is "silly." The forfeiture arose under a scheme that was not safe harbor - and should be used as the plan allows for such forfeitures. Under a safe harbor scheme, no forfeitures would arise from safe harbor contributions (always vested) and hence an added cost tot he employer to offset the benefit received.

Want to discuss policy? Great. I could some "transitional" rule that allows forfeitures to be used to offset some of the contributions, or for them to be "banked" beyond the current year to offset plan expenses without penalty as an incentive to induce employers to adopt safe-harbor plan provisions - but to simply give them the benefit without any "cost" just doesn't fly in my book - especially since the employer could pretty much at will terminate the safe harbor provision as soon as the forfeitures were eaten up....

[austin3515]

A safe harbor plan paid for entirely by forfeitures? Sign me up! I've never seen forfeitures account for more than a smidge of the safe harbor.

I have a feeling your hard-working business owners clients would not see it from your perspective, just a hunch

[MoJo]

Actually - first, I've seen plenty of plans with way, way too much in the forfeiture account (and it's a nightmare to correct). Second, most of my clients understand the rules - and want to stay on the straight and narrow. They prefer to use forfeitures to either pay expenses the participants would otherwise have to pay, or to increase benefits to those that make their business possible. Maybe I just have more altruistic clients than most, but that's the way my book of business runs.

Even so, as I said before - want to debate the policy issue? I'm all ears. But I'll stand on my position that a benefit has to come with a cost - and unless you can show me the cost to the employer who uses forfeitures incurred under a non-safe harbor period of the plan to offset the costs of a safe harbor plan contribution - we'll have to simply disagree on the policy issues involved.

[Bird]

Thanks Mojo, you stated my position as I would have. Austin, I'm trying to take a step back and see things from a national policy perspective; if you're just looking at it from a narrow perspective of a retirement plan consultant/administrator and what is best for you and your clients then there is no point to the conversation.

Congress' opinion is what matters, not the employee and not economists. Congress passed the law. IRS is interpreting it, yes, somewhat narrowly. If you look at the 1996 summary of legislation prepared by the joint committee on taxation, which I did, it says, under the safe harbor provisions explanation - "The result that the nondiscrimination rules are intended to produce can also be achieved by creating an incentive for employers to provide certain matching contributions or non-elective contributions on behalf of rank-and-file employees."

(my emphasis)

Which pretty much backs up my point.

[austin3515]

_{Austin, I'm trying to take a step back and see things from a national policy perspective;}

[bird, first and foremost let me say that I learn more from your posts on this forum than from almost any other poster. but I do disagree with you here, and I think that this is kind of fun . So I'll say in the office "well Bird said... and he's sharp! ]

I'm sorry but use of forfeitures should not be public policy. We're talking about a pimple on an elephant's but here as far as national policy goes, even as retirement plan policy goes.

[Bird]

I agree that it's trivial.

[K2retire]

If they would change the top heavy exception to allow for forfeiture reallocation without triggering a THM (or limiting it to the forfeiture allocation) it would solve the IRS concern about vesting and most employers' concerns about not wanting to allocate the forfeitures.

[austin3515]

That would make me happy, I think the top-heavy exemption is the most potentially cataclysmic issue, especially for a TH SH Match plan with very low participation. I submitted a question to the ASPPA IRS Q&A on this point. I hope they take it!

[movedon]

I agree with the notion that it's not a stretch from a policy or intent standpoint that forfeitures shouldn't fund safe harbor contributions. But I agree even more with notion that it's trivial, and it also seems like one more little unnecessary IRS dig against safe harbor 401(k)s, right along with the position that you can't amend them mid-year even for lots of reasons that are pretty immaterial to the safe harbor nature of the plan. Why do they hate safe harbor 401(k)s?

[PFranckowiak]

As Always it's the small employer that gets the bad end of the deal. This would never hit larger employers that aren't top heavy, but really can hurt the small Employer that is top heavy because he has only two other employees. He has just added the Safe Harbor Plan, was previously just a Profit Sharing. Now his choice is to use forfeitures for fees, or fall into a problem with top heavy due to the forfeiture reallocation.

Therefore, most small employers are not going to have additional allocations, unless they will put enough in to cover top heavy. Actually is less for the employees.

[austin3515]

As Always it's the small employer that gets the bad end of the deal.

I always tell my clients that these rules are targeted against small, long-term employers, or worse yet small long-term family owned businesses, and that the likes of Microsoft and IBM are exempt from these rules. Believe me if they affected CitiGroup the way they affect small employers, these rules would have been tossed in the trash long ago!