Forfeitures To Offset Safe Harbor

[austin3515]

That dreaded day has arrived. SH MAtch Plan with $5,000 of forfeitures and just $2,000 of expenses (for my services). That's $3,000 down the drain.

No choice but to allocate as additional match... Fabulous. My client will be thrilled.

Any word on whether or not the IRS will get their head out of their ___ and fix this idiocy? This client is already plunking in about $100K in match!! Why stick it to them??

[BG5150]

Hopefully, the plan is not Top Heavy.

[austin3515]

It is not. But regardless, we do have the ACP Safe Harbor Match. Hopefully everyone knows that, but I'm sure some bundled plans with ____ will not have been so smart

[BG5150]

Just charge them an extra $3,000 for something....

[Bird]

Have them pre-pay your fees.

[austin3515]

We are having them pay our next 4 quarters fees. $3,000 would be almost 2 years of fees. I do try to sleep at night...

[MoJo]

Austin, for $3,000, I'll write a letter to the IRS on the plan's behalf. That solves the problem, doesn't it?

[Bird]

We are having them pay our next 4 quarters fees. $3,000 would be almost 2 years of fees. I do try to sleep at night...

What's the problem? I'm not saying I do it all the time but have had 2 or 3 years prepaid.

[jpod]

If there isn't a discount or some other significant incentive to pre-pay service provider fees doesn't that raise a fiduciary breach issue (which is already staring us right in the face in view of the need to allocate unused forfeitures to participants)?

[Bird]

If there isn't a discount or some other significant incentive to pre-pay service provider fees doesn't that raise a fiduciary breach issue (which is already staring us right in the face in view of the need to allocate unused forfeitures to participants)?

Mmmm, I'm not sure. If the plan says you can use forfeitures to pay fees or allocate to participants, then I don't see one having priority over the other and don't see it as a fiduciary breach. On a practical level - and I am nothing if not practical - I don't see it being raised as an issue on audit. I kind of see it as stickin' it to 'em (the IRS) for having such a dumb rule.

As an aside, how many times have you seen incompetent providers such as (starts with Pay and ends with X) have a startup plan with a profit sharing contribution in the first year, for say 5 participants, and then the plan grows to 25 participants and someone forfeits and they allocate $100 across 25 participants and create accounts for $.25 or whatever that would have never otherwise existed? Kind of off point I guess but I'm making the case for creative use of forfeitures paying fees.

[jpod]

Ok, forget about the motivation: Is it prudent for a fiduciary to use plan assets to make a significant pre-payment for administrative services? It depends on the facts and circumstances, but you need to be able to come up with SOME reason why it was in the best interest of the plan (rather than the plan sponsor).

[Bird]

OK. I respect that viewpoint (but from there it would never be prudent to use plan assets to pay fees).

[jpod]

No need to go that far. We only are talking about a significant pre-payment of fees, not paying fees.

[Bird]

For some reason this has been an itch that needs to be scratched. Let me be clear, I'm not trying to be argumentative, just having a discussion.

If we are going to talk about the best interest of the plan, then it doesn't matter if we are talking about a single year's fees, or a pre-payment. It will never be in the best interest of the plan (participants) to use forfeitures to pay fees that would otherwise be paid by the plan sponsor. To do so is to take money that could be allocated to participants and...well, to not allocate it. But, it is allowed, and the point is that to use the standard of the best interest of the plan is a slippery slope.

Which sends me on a tangent about the DOL's proposed fiduciary rule...the intent of it is worthy, and they have correctly identified a problem - most brokers and "financial advisors" are getting more than they deserve (for the record I am a broker). We have lots of choices of share classes when using a platform, and the choice of share class directly affects broker compensation. I'm fortunate to work with a lot of high asset/low participant cases, and can often use a share class that pays me 25 bps (instead of 50 bps or 75 bps) without impacting other (direct) recordkeeping fees. I feel that's reasonable for me and reasonable for plan participants. I'm not too worried about the DOL "coming after me" in this situation, but if I am a fiduciary, I really have to use a share class that pays me nothing, if available. Another slippery slope that I don't think they fully thought through.

(Sorry if this isn't totally coherent but I just ran out of time and energy.)

[Mike Preston]

I thought it was coherent. And appreciated.

[jpod]

Your comments on the new definition of fiduciary are quite coherent. Not so much on the fee pre-payment issue. It is a given that the plan can pay reasonable fees if the terms of the plan don't prohibit it. There is no fiduciary risk to the employer whatsoever in electing not to pay the fees itself. But, there is a fiduciary risk in my judgment to pre-pay fees which don't need to be pre-paid unless you can come up with a reason to do so (and that reason can't be to use up forfeitures).

[mbozek]

Why cant the 3,000 be credited as a withdrawal at the end of the plan year and a contribution at the beginning of next plan year ?

[austin3515]

_{It could, but we are trying to benefit our clients, not their employees. But in our client's defense, they already providing a very generous benefit via the Safe Harbor Contribution.}

[jpod]

To add to my own comments, if the plan permits the use of all plan assets to pay expenses, not just forfeitures, then I suppose the employer can bite the bullet and allocate the forfeitures this year, but next year, or whenever thereafter there aren't forfeitures available to pay expenses, it can tap participants' accounts to pay the expenses, so eventually the employer does not get hurt by the IRS interpretation which Austin and everyone else legitimately complains about. It would have a PR problem on its hand if it did that, and that alone may be a reason not to do it, but legally it would be perfectly sound.

[BG5150]

What's the drawback to allocating as additional match? Top Heavy issues?

[austin3515]

What's the drawback to allocating as additional match? Top Heavy issues?

It does not reduce out of pocket costs for the plan sponsor. Do we not all agree that this is the point of a vesting schedule at the end of the day? To reduce costs for the employer?

[jpod]

It may be or may not be the primary reason for a vesting requirement, but it is always an expected benefit of one.

[austin3515]

Fair enough... But in my experience the vast majority do it as a cost-savings measure. If they didn't care about using the forfeitures they would vest the money outright (and some do).

I have 2 clients (out of many) who actually reallocate forfeitures to the remaining participants.

Having changed jobs twice and forfeiting non-vested portions I have always been of the opinion that vesting does little to increase length of service. IF a better opportunity comes around, people are inclined to take it based on the penny-wise pound foolish doctrine. For example, I have no regrets about the decisions I made, having left for raises, etc. each time.

[Lou S.]

What's the drawback to allocating as additional match? Top Heavy issues?

It does not reduce out of pocket costs for the plan sponsor. Do we not all agree that this is the point of a vesting schedule at the end of the day? To reduce costs for the employer?

I thought it was to benefit long term employee and encourage loyalty...at least once upon a time when I started in this business.

[BG5150]

I think way back, when a lot of schedules were cliff, vesting was used as a loyalty tool. If there's a 10-year cliff and you've been there 8 years, would you want to leave and forfeit 8 years worth of PS and earnings? Could be a big chunk of change, especially for the higher paid workers.

I think the acelerated vesting schedules, like 3 year cliff or graded shedules became recruiting tools--you won't have to spend 5-10 years here before you start seeing pension rewards.