reversion of assets and safe harbor plan

[Tom Poje]

db plan terminates and assets are transferred to a safe harbor plan.

of course the question becomes "Can these assets be used to fund the safe harbor"

the assets weren't 100% vested when made to the DB originally, so my thought would be no, they can't be used

certainly they can't be used if it is a match, because the IRS said you can't prefund a match.

on the other hand, technically the DB plan terminated so everything would be 100% vested, but that makes no sense, because there is nothing that says when you allocate the excess assets in the DC plan they have to be 100% vested as well.

[Belgarath]

Kind of a gray area.

Sal references a couple of PLR's - 201147032, and 201221059, where the IRS specifically ruled that the transferred funds couldn't be used to fund matching contributions, as you mentioned. However, he also makes the statement that a safe harbor 401(k) plan may be treated as a qualified replacement plan.

I read the PLR's, and I agree with that.

However, he doesn't address your specific issue of whether those funds can fund the safe harbor non-elective contribution requirement - and this specific question was not asked in the PLR's, nor did the IRS address it.

Short of requesting a PLR on this specific question, it seems like "you pays your money and you takes your chances." I would be a little hesitant (as I typically am) to take the aggressive stance and say it is allowable. At the very least, I'd put it to the employer to use ERISA counsel to make the decision. Given the IRS general lack of flexibility on safe harbor plans, I'm not sure where they would stand on this question.

[My 2 cents]

1. Wouldn't the assets, as transferred from the db plan, all be considered rollovers into the 401(k) plan and thus unrelated to any contribution requirements under the 401(k) plan?

2. Are the db funds being transferred based on participant elections (with spousal consent!) to do so? Otherwise those funds are permanently subject to the QJSA requirements (including payment as an annuity as the default). Or have the rules changed while I was looking at something else?

[david rigby]

I think the original post is related to IRC 4980 transfer. Correct?

[Tom Poje]

correct, these assets do not belong to the participants, and they would otherwise be treated as a reversion if not transferred to the 401k plan.

the fully vested requirement has me leaning toward caution as to the ability to apply them safe harbor contributions.

[austin3515]

But they will be 100% vested when made to THIS Plan. I think that is especially true if you can use it all up in the first deposit right when it xfers over.

[Tom Poje]

But I've had DC plans that had a suspense account before for such assets, and these $ were gradually released as profit sharing 'contributions' that were not 100% vested. I don't see any requirement that these assets have to be 100% vested when released.

[Mike Preston]

I'm confused. I thought the IRS' requirement related to the "100% vested when contributed" was with respect to QNEC's, not S-H contributions.

[Tom Poje]

page 36 of the LRM for CODAs (p 39 of the PDF file) clearly states you can't use forfeitures for safe harbor

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

as for whether safe harbor contributions are QNECs or QMACs

1.401(k)-3(e)(1) last sentence says

if...safe harbor match or nonelective contributions....that the contributions will be QNECs or QMACs....

I suppose you could argue that this section "only" applies if such contributions are made to another plan, but to me that would seem strange, but then the regs are strange at times.

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

since safe harbor contributions are used to satisfy the ADP test, that in itself implies they have to be 100% vested when made to the plan.

(the exceptions being QACAs which could be on a 2 year cliff, or safe harbor match used in the ACP test.

coda lrm.pdf

[Belgarath]

Not saying the IRS is correct, but they take the interpretation that contributions to fund a safe harbor under 401(k)(12) must be nonforfeitable WHEN MADE to the plan, thus precluding the use of forfeitures. It seems like a pretty strained interpretation as far as I'm concerned, but who wants to try it in court? Plus, as far as I know, the pre-approved plan docs for PPA already incorporate this interpretation ('cause that's what the IRS wanted in the LRM's) so it is a moot point as to whether it is technically correct or not - that's what the plans say.

Looks like Tom already beat me to it...

[Tom Poje]

I did get one response from an IRS individual through someone else in regards to using the 'reversion' assets

"it's a close call ... he leans towards "yes," but it's not definitive by any stretch of the imagination"

I do have it in for the Q and A session for the next ...what is it now...ARA Conference, I think they changed the name....

[Mike Preston]

Pre-PPA (a/k/a GUST) documents frequently allowed forfeitures to be used as SHNE contributions.

As noted, MOST PPA documents now restrict the use of forfeitures to fund SHNEc's. I would guess that those that don't have the SHNEc restriction constitute a mistake on the part of the IRS. Every PPA document I've seen, of course, has the QNEC requirement that they can only come from monies which are 100% vested when contributed to the plan.

What is interesting is that the PPA documents I've seen draw a fine line distinction between the two prohibitions. QNEC's and QMAC's specifically state the requirement that they can only come from monies which are 100% vested when contributed to the plan. SHNEc's don't have that specific language. Instead, the restriction is specific to forfeitures. I acknowledge that forfeitures are precluded by document language from being used to fund SHCEc's.

However, Tom's original question is whether the general prohibition on use of forfeitures to fund SHNEc's carries over to a similar prohibition on the use of a QRP's suspense account to fund the SHNEc's. And nothing in the language of the PPA document I've looked at makes that connection.

Whatever happened to the general rule that "if it isn't prohibited, you can do it"?

I lean strongly toward being able to use QRP suspense account funds.

I note that the use of a SH 401(k) document as a QRP is somewhat internally contradictory. I suppose there are some documents that provide for some sort of dribble out of the QRP suspense account. But most I've seen are worried about having so much in the QRP suspense account that emptying it within 7 years is a real concern. As such, with participants bumping up against the 415 limits, why would you want a 401(k) provision at all?

[cheersmate]

On 4/8/2015 at 3:38 PM, Mike Preston said:

Pre-PPA (a/k/a GUST) documents frequently allowed forfeitures to be used as SHNE contributions.

As noted, MOST PPA documents now restrict the use of forfeitures to fund SHNEc's. I would guess that those that don't have the SHNEc restriction constitute a mistake on the part of the IRS. Every PPA document I've seen, of course, has the QNEC requirement that they can only come from monies which are 100% vested when contributed to the plan.

What is interesting is that the PPA documents I've seen draw a fine line distinction between the two prohibitions. QNEC's and QMAC's specifically state the requirement that they can only come from monies which are 100% vested when contributed to the plan. SHNEc's don't have that specific language. Instead, the restriction is specific to forfeitures. I acknowledge that forfeitures are precluded by document language from being used to fund SHCEc's.

However, Tom's original question is whether the general prohibition on use of forfeitures to fund SHNEc's carries over to a similar prohibition on the use of a QRP's suspense account to fund the SHNEc's. And nothing in the language of the PPA document I've looked at makes that connection.

Whatever happened to the general rule that "if it isn't prohibited, you can do it"?

I lean strongly toward being able to use QRP suspense account funds.

I note that the use of a SH 401(k) document as a QRP is somewhat internally contradictory. I suppose there are some documents that provide for some sort of dribble out of the QRP suspense account. But most I've seen are worried about having so much in the QRP suspense account that emptying it within 7 years is a real concern. As such, with participants bumping up against the 415 limits, why would you want a 401(k) provision at all?

Hello Mike -

In light of the 2017 Prop Treas Reg published 1/18/2017... am hoping you will consider the following and reply?

The volume submitter doc used for the SH 401(k) PSP has the following provisions:

TRANSFER OF ASSETS FROM TERMINATED EMPLOYER DEFINED BENEFIT PENSION PLAN
(a) Transferred DB Assets. The Employer may transfer an amount to this Plan from the Employer's terminated defined benefit plan in accordance with Code §4980(d)(2)(B). The amounts transferred into this Plan shall be held in a "transferred assets suspension account." Amounts released from the "transferred assets suspension account" pursuant to the provisions of this Section shall be allocated in the same manner and to the same Participants that Employer Nonelective Contributions are allocated, as described in Section 4.3. If the Plan does not provide for Nonelective Contributions, then the amounts released from the "transferred assets suspension account" pursuant to the provisions of this Section shall be allocated to each Participant eligible to share in allocations in the same ratio as such Participant's Compensation bears to the total Compensation of all Participants eligible to share in allocations.
The Employer will determine, in its discretion, the amount to be released from the "transferred suspension account." However, the minimum amount that shall be released from the "transferred assets suspension account" for any Plan Year is the percentage of the account based on the following table:
Years Since Transfer Percentage of Suspense Account
0 14.2857%
1 16.6667%
2 20.0000%
3 25.0000%
4 33.3333%
5 50.0000%
6 100.0000%
(b) Earnings. The amount in the "transferred suspension account" shall be credited with earnings and losses as of each Valuation Date in accordance with Section 4.3, except that Participants may not direct the investment of amounts in the "transferred suspension account." Amounts released from the account prior to the last day of a Plan Year shall not share in such earnings or losses.
(c) Annual additions. Notwithstanding anything in the Plan to the contrary, amounts in the "transferred suspension account" shall not be treated as "annual additions" pursuant to Section 4.4 until such amounts are released and allocated to Participants.
(d) Plan termination. If upon the termination of the Plan any amount credited to the "transferred suspension account" remains unallocated, then such amount shall be allocated as provided above to the Accounts of Participants as of such date of Plan termination, but limited as to each Participant to avoid allocating exceeding the limitations of Code §415 as set forth in Section 4.4. Any amount that cannot be allocated to a Participant under the preceding sentence shall be reallocated to remaining Participants, but only to the extent that no Participant receives an amount that exceeds the limitations of Code §415 as set forth in Section 4.4. The reallocation process will continue until all amounts in the "transferred suspension account" have been reallocated. If all Participants have received the maximum "annual addition" permitted pursuant to Section 4.4, then any remaining amounts shall revert to the Employer.

Section 4.3 references is 4.3 ALLOCATION OF CONTRIBUTIONS, FORFEITURES AND EARNINGS

QUESTIONs: Based on this provision and the 2017 Proposed Treasury Reg (1/18/2017) changing/requiring that amounts be fully vested when allocated:

1 - do you believe the surplus assets can be transferred directly from a terminated DB to the employer's SH 401(k) PSP as  the "QRP"? Or is a new "PSP only" plan necessary to receive the surplus?

2 - can be placed into a suspense account and utilized over time (current year and beyond if not all allocated this year, provided all surplus are utilized within 7 year) for purposes of both the  SHNEC and Profit Sharing? 

Thank you

[Mike Preston]

No time to do research at the moment.  If you want me to review in light of further developments taking place after a specific date, please provide a link.