Forfeitures Not Used for SH... BUT

[austin3515]

Plan has a safe harbor match only - no other er contributions (other than discretionary contributions).

Have a plan with around $10,000 of "forfeitures" being generated related to a correction to Safe Harbor Match (they used comp over the a17 limit).

The IRS prohibition of using forfeitures for SH is based on the fact that the contributions needed to be 100% vested "when made." These were, as they were intended to be SH Match. Anyone have a problem using this to offset the match? The Plan is not audited, and $10,000 is about 5 years of my fees!

I would assume this has come up before, and perhaps addressed by the IRS?

[jpod]

I don't know if it has come up before. I think what you are proposing is fine, but for a different reason than the one you are suggesting. Even assuming for the sake of argument that the IRS' position is correct, this is not a "forfeiture." A forfeiture results from an allocation required under the terms of the plan which was subject to a vesting condition, i.e., a risk of forfeiture. While we call these corrections of impermissible allocations "forfeitures," they are not forfeitures.

[austin3515]

Compliments to TAGData for pointing me in the right direction,

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.06 Special rules relating to Excess Amounts.

(2) Correction of Excess Allocations. ... If the improperly allocated amount would not have been allocated to other employees absent the failure, that amount (adjusted for Earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for Earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year. ...

[Tom Poje]

somewhat similar to the IRS at the 2010 ASPPA Q and A

at least based on the chicken scrawl note I wrote, since this was not in the handout. the handout merely said to be discussed from the podium.

Q and A 27 (though they weren't numbered)

The issue was raised about forfeitures arising from related match (those matches forfeited due to a return of deferrals for a failed ADP test). The response was that those are probably not “forfeitures” in the sense that is commonly used—resulting from unvested balances

[AdKu]

I run into somewhat similar situation with a takeover plan.

The only contribution allowed in the plan are pre-tax deferral and non-safe harbor match, and in fact rollovers.

In the absence of non-elective contribution provision in the plan, the forfeiture originated from the match never been used since the plan inception in 2005 (although at this time I don't have full information when the first forfeiture occurred).

I am planning to file VCP amending the plan to allow non-elective contribution.

This plan is in process of termination and most of its employee were terminated before 2014 except the owners.

Is this permissible to allocate the forfeiture to the owners only?

I appreciate if anyone can share their experience and the correct way to rectify this forfeiture issue.

[Mike Preston]

I'm confused. You say it is a "non-safe harbor" match. How is that related to the topic being discussed?

[AdKu]

Just to make a distinction between the two matches, the original post referred to SH Match, and in my case it is not a SH Match.

And also to indicate the possibilities that the client could have used the forfeiture to reduce the Match, which was payroll by payroll in my case.

[K2retire]

I run into somewhat similar situation with a takeover plan.

The only contribution allowed in the plan are pre-tax deferral and non-safe harbor match, and in fact rollovers.

In the absence of non-elective contribution provision in the plan, the forfeiture originated from the match never been used since the plan inception in 2005 (although at this time I don't have full information when the first forfeiture occurred).

I am planning to file VCP amending the plan to allow non-elective contribution.

This plan is in process of termination and most of its employee were terminated before 2014 except the owners.

Is this permissible to allocate the forfeiture to the owners only?

I appreciate if anyone can share their experience and the correct way to rectify this forfeiture issue.

When we have corrected for similar issues, the forfeitures had to be allocated in the year when they occurred to the employees at that time.

[AdKu]

Than you K2retire,

My understanding has been the same as yours until I got involved with this case.

Since I consider myself new for the retirement industry (or lack real time practical experience), I started researching in great detail to make certain I'm following the correct correction methods.

I checked many places on the issue, including ERISA Outline Book, Cornell University Law school on the web for IRS codes, DOL and Treasury Regs. as well as each individual authorities websites, some ASPPA Conference Handouts and this benefitlink board.

What drove me to post my question was what I read in the Spring 2010 Retirement News for Employers, link and excerpt below:

https://www.irs.gov/pub/irs-tege/rne_spr10.pdf

"Generally, this failure can be corrected by reallocating all forfeitures in the plan’s forfeiture suspense account to all plan participants who should have received them had the forfeitures been allocated on time. The plan sponsor should revise prior plan year allocation reports to reflect the forfeiture allocation and pay any amounts due to terminated participants. Depending on the plan terms or the facts and circumstances of a particular situation, it may be appropriate to take the non-current-year forfeitures and use them as employer contributions for the current plan year. Plan sponsors should apply the correction principles in Revenue Procedure 2008-50, section 6 when making correction."