Excess Annual Additions in Safe Harbor 401(k) Plan

[MarZDoates]

Safe Harbor 401(k) Plan using 3% QNEC. Currently the only contribution sources are employee deferral (pre tax AND Roth) and Safe Harbor. (The plan document does permit discretionary profit sharing contributions, but thus far there have been no profit sharing contributions.)

Problem: There were partners that “deferred” and received safe harbor contributions on their “distributions” (as noted in Box 19 of K1) during the year. However, their SE earnings for 2015 were actually 0. This created excess annual additions for 2015.

It is my understanding that in order to correct excess annual additions: First the employee deferrals (adjusted for earnings) must be distributed to the participants. Then employer contribution (adjusted for earnings) must be forfeited and placed in an unallocated suspense account and used to reduce future employer contributions. No employer contributions may be made until the “suspense” account is used up.

First question: Does this mean that until the suspense account is used up, the employer may not make safe contribution to any participant? (non partner/staff)

Second question: Since we are not permitted to use forfeitures to reduce safe harbor contributions, what do we do with the amount in the suspense account? Since the contributions were fully vested when originally deposited are they technically considered a forfeiture? Can we still use them to “fund” future safe harbor contributions?

Or, should the plan sponsor declare a profit sharing contribution for 2016 and then use the suspense account to reduce the p/s contribution?

Thank you.

[BG5150]

1. That is correct. Any ER contribution that would have otherwise been deposited must be offset by the amounts in the "suspense" account. The amounts may not be used to pay fees.

2. These are not forfeitures, even though in most, if not all, r/k systems, the suspense funds are held in the forfeiture account. EPCRS, in this case, does not say the amount is "forfeited." It says "the account balance of an employee who received an Excess Allocation is REDUCED by the Excess Allocation (adjusted for Earnings)." (emphasis, mine)

Forfeitures are unvested funds that leave a participant's account for any of several reasons. The are not unvested funds, they are mistaken funds. So, you do not run afoul of the "no forfeitures to fund safe harbor" rules.