Proposed Regs for definition of QNEC and QMAC

[Kevin C]

Scheduled to be published tomorrow.  Looks like we can go back to using forfeitures to fund safe harbor contributions, as long as your plan allows it.  Fortunately, our VS document has the phrase "unless provided otherwise under IRS guidance" at the end of the sentence about not using forfeitures towards SH contributions.

https://www.federalregister.gov/documents/2017/01/18/2017-00876/definitions-of-qualified-matching-contributions-and-qualified-nonelective-contributions

 

Quote

Explanation of Provisions
After consideration of the comments described in this preamble in the
“Background” section, the Treasury Department and the IRS are proposing to
amend §1.401(k)-6 to provide that amounts used to fund QMACs and QNECs
must be nonforfeitable and subject to distribution restrictions in accordance with
§1.401(k)-1(c) and (d) when allocated to participants’ accounts, and to no longer
require that amounts used to fund QMACs and QNECs satisfy the
nonforfeitability and distribution requirements when they are first contributed to
the plan.

Quote

Proposed Effective/Applicability Date
These regulations are proposed to apply to taxable years beginning on or
after the date of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register. Taxpayers, however, may rely on these
proposed regulations for periods preceding the proposed applicability date. If,
and to the extent, the final regulations are more restrictive than the rules in these
proposed regulations, those provisions of the final regulations will be applied
without retroactive effect.

 

[Belgarath]

Hurray! About time, but kudos to the IRS for finally taking a sensible approach on this.

[rcline46]

Be very careful of your document language.  I think the Corbel prototype and volume submitter would need an amendment.

[Belgarath]

RCline - I sent a query to FIS on this, and if they respond to me prior to doing a general release, I'll let you know. I'm thinking the current language in the VS (in AA format, at least) would allow it. It refers to contributions that must be 100% vested pursuant to the Code when contributed. But the Code/Regulations will be modified to say 100% when allocated, rather than contributed. So I THINK it'll work. But we'll see once we actually get the IRS guidance, and confirmation from FIS. 

[Tom Poje]

but it does go to show, the way the regs used to read you couldn't do that - even if anyone thought otherwise, or that it really didn't make sense, was stupid, etc.

[Kevin C]

Tom, even the IRS didn't realize the implications of what they had done in the regulations until after the EGTRRA pre-approved documents had been approved.  So, most, if not all, of the EGTRRA documents allowed the use of forfeitures towards safe harbor contributions, QNECs or QMACs.  Our document provider took the position that because the Opinion letter covered that provision, it could be used until the plan was restated for PPA. The IRS made everyone change their PPA documents to say forfeitures could not be used towards QNECs, QMACs or SH.   Fortunately, our PPA VS document anticipated that the IRS might change their mind. 

[RatherBeGolfing]

On 1/17/2017 at 0:51 PM, Kevin C said:

Proposed Effective/Applicability Date
These regulations are proposed to apply to taxable years beginning on or
after the date of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register. Taxpayers, however, may rely on these
proposed regulations for periods preceding the proposed applicability date.

So we can rely on the proposed reg with respect to 12/31/2016 year end plans if the document allows for it.

What about a plan that does not allow for it because the PPA language did not anticipate the IRS change of heart.  Could a January 20, 2017 amendment be applicable to the 12/31/2016 plan year?

[Kevin C]

If you don't think your document allows you to use the new rule, you should ask your document provider.  It's something they should be looking at now, anyway. If the document language is a problem, you can ask them if that is something that can be fixed retroactively with an interim amendment.  Our VS document language is clear, so I haven't gone down that road. 

[RatherBeGolfing]

5 minutes ago, Kevin C said:

If you don't think your document allows you to use the new rule, you should ask your document provider.  It's something they should be looking at now, anyway. If the document language is a problem, you can ask them if that is something that can be fixed retroactively with an interim amendment.  Our VS document language is clear, so I haven't gone down that road. 

Thanks.  I went over the FTW VS Document and I'm pretty sure it requires an amendment as it appears they did not draft the document to be flexible in case the IRS changed their minds.

I spoke to FTW support and they said they were reviewing the guidance and will send out a technical release in a few weeks...

Edit:  If anyone else uses FTW documents it may speed things up if you submit a support ticket asking for speedy guidance.  The more the merrier right :)

 

[austin3515]

My question on this is:  Let's say you're funding the 2016 Safe HArbor today. Can you use forfeitures today? 
You have until 12/31/2017 to adopt this kind of a discretionary amendment.  But does it apply to when the contribution is funded or when it is accrued?  I think that is a critical question that perhaps is not explicitly addressed. 

And if that is the case I'm using the interpretation that works best for my clients!

[John Feldt ERPA CPC QPA]

When did the plan first restate for PPA? Then look at your basic document. It probably says that that starting with the first plan year after the PPA restatement is first executed, that forfeitures cannot be used for allocations of QNECs, QMACs, or safe harbor.  If that is in there, with no additional clause added like "unless otherwise allowable", then your plan won't let you use the proposed regulation language until you amend the document since you must follow the terms of the plan. Yes, your plan can be more restrictive than the rules would allow.

[Kevin C]

What does the plan say?  Our VS document says you can't use forfeitures for SH contributions unless provided otherwise in IRS guidance.  With that language, I feel comfortable using forfeitures towards 2016 SH.

The new guidance also gives me more comfort in our decision prior to our PPA restatements to rely on the EGTRRA Opinion letter and use forfeitures towards the SH contribution. We restated all our SH plans effective 1/1/16 because of this issue. 

[austin3515]

Here is what mine says:

Quote

Effective for Plan Years beginning after the Plan Year in which this Plan document is adopted, Forfeitures may not be used to reduce Employer contributions which are required pursuant to the Code to be fully Vested when contributed to the Plan (such as QMACs, QNECs and "ADP test safe harbor contributions" other than QACA "ADP test safe harbor contributions").

I'm using the forfeitures in 2017!  I think there is room for interpretation.  The language was just not specific to my question, I don't think.,

[GMK]

22 minutes ago, austin3515 said:

You have until 12/31/2017 to adopt this kind of a discretionary amendment.  But does it apply to when the contribution is funded or when it is accrued?

Other threads on BenefitsLink have me befuddled about the meaning of the word "accrue"

For my personal edification, would you please 'splain what "accrued" means in your sentence?

Thanks.

[austin3515]

Johnny has comp of $100,000 in 2016.  the Plan includes a 3% Safe Harbor Nonelective.  Johnny ACCRUES a benefit of $3,000 during 2016.  His employer FUNDS the benefit that accrued in 2016 during 2017.

[MoJo]

Just an FYI:  Our version (major modifier) of the Relius VS says (paraphrasing) forfeitures may not be used to offset contributions that must be non-forfeited when contributed - which in my mind says since the safe-harbor contribution per this guidance no longer needs to be non-forfeitable when contributed but only when allocated, we can do this - BUT it goes on to say "such as" QNECS, QMACS and a few other things (not including safe harbor contributions).  I read that as examples that under this guidance are no longer applicable, and therefore superfluous (and not limiting the preceeding clause).  Relius' preliminary answer is that they think an interim amendment is necessary.

We also support the off the shelf ASC document, which indicates it's not allowed" "unless" further regulatory guidance permits it - so that document appears ready at this time.

[Belgarath]

MoJo - my initial impression is the same as yours, but I got the same initial response from FIS that you did. Perhaps they are just being very cautious, at least for now - I don't know. But I'm sure they will be doing some sort of release explaining their position. We are using the VS document in AA format.

[MoJo]

12 minutes ago, Belgarath said:

But I'm sure they will be doing some sort of release explaining their position. We are using the VS document in AA format.

Yes, they've indicated further guidance to us as well - but we already have clients (through their advisors) wanting to consume forfeitures sooner rather than later.  We also have an AA version of the VS.

[GMK]

14 hours ago, austin3515 said:

Johnny has comp of $100,000 in 2016.  the Plan includes a 3% Safe Harbor Nonelective.  Johnny ACCRUES a benefit of $3,000 during 2016.  His employer FUNDS the benefit that accrued in 2016 during 2017.

Thanks, Austin.  That makes sense.

[Tom Poje]

FT William has

 

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)).

 

so we have a question in to them how they will handle.

I'm certainly expecting some sort of amendment of some type.

[Tom Poje]

FT William has informed us

 

at this time we are planning on releasing a snap-on amendment later this year to allow for the use of forfeitures to fund QNEC, QMAC, and safe harbor contributions

[RatherBeGolfing]

42 minutes ago, Tom Poje said:

FT William has

 

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)).

 

so we have a question in to them how they will handle.

I'm certainly expecting some sort of amendment of some type.

FTW just responded to my request from yesterday with the following

1. Does the FTW document allow for us to use forfeitures for SH contributions in light of the proposed rule?
ANSWER:  No
2. If it does not, will we be able to to tack on an amendment to allow us to do so for the 12/31/2016 plan year?
ANSWER:  No.  This regulation did not make the changes until 2017 so this can only be applied prospectively.
3. if so, when can we expect such an amendment? Since CPAs are already beating down our door for 2016 numbers, we need guidance on this ASAP.
ANSWER:  We will be releasing an email soon with more details so please watch for that communication.

 

[austin3515]

Ahh, but what do you do for a 6/30 year-end? That is the million dollar question!We use Relius and I like the interpretation displayed above (i.e. the refrence to "contributed" has been obsoleted by the new guidance), and for me I think it's enough to get me there for 2016 and any plan year ends between now and when I get my hands on the amendment.  Be curious to see if Relius addresses this.

[austin3515]

Rather be Golfing, is there a dislike button on these boards anywhere?   I think its possible that there would be different interpretations personally, but lets see. Leave it to the IRS not to address the most glaring question.

[RatherBeGolfing]

Just now, austin3515 said:

Rather be Golfing, is there a dislike button on these boards anywhere?   I think its possible that there would be different interpretations personally, but lets see. Leave it to the IRS not to address the most glaring question.

LOL if so can I dislike my own post?  Im not sure I agree with FTWs interpretation as to applicable plan years

[Tom Poje]

Since you can make comments, I went out and asked

"if plan is amended to allow use of forfeitures as permitted under the proposed regs, can the forfeitures be used for plan year's ending 2016"

(I did not add "Because Austin Powers will get mad otherwise"

or

RatherBeGolfing 'wants to know", but maybe that would have helped)

[austin3515]

You asked the IRS?  That's pretty neat...

[austin3515]

Tom you can tell them if they don't want to answer to this guy they better give us the answer we want!

[Tom Poje]

anytime there are proposed regs there is a blurb such as

 

Comments and requests for a public hearing must be received by April 18, 2017.

 

ADDRESSES:

Send submissions to CC:PA:LPD:PR (REG-131643-15) Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-131643-15), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at Start Printed Page 5478www.regulations.gov (IRS REG-131643-15).

 

so I clicked on the link, entered the IRS Reg-131643-15

and entered a comment.

by the way, for name you can enter 'anymous'

 

it can't hurt to ask, though usually I forget about being able to do that!

[RatherBeGolfing]

6 minutes ago, austin3515 said:

Tom you can tell them if they don't want to answer to this guy they better give us the answer we want!

Are you threatening the IRS with  sharks with frickin' laser beams attached to their head????

[austin3515]

I'm going to sue them for 1 million dollars!!

[DMcGovern]

1 hour ago, RatherBeGolfing said:

LOL if so can I dislike my own post?  Im not sure I agree with FTWs interpretation as to applicable plan years

Agreed!  I'll be very interested in FTW's communication and [likely] amendment for this.  I don't always agree with the person responding to my question through customer support and have to seek out assistance elsewhere within FTW.

[Tom Poje]

Don't know how other document providers are handling;

FT William did send out a nice list of Q and As on this issue

basically, yes you need to amend, no client doesn't need to sign, no SMM needed, they are shooting for start of second quarter to have the amendment available.

their list did indicate

Q3:  Do these regulations allow us to use forfeitures to offset 2016 QNECs and QMACs?

A3:  No, these regulations were published in 2017, and they did not contain a retroactive applicability date, so they are not applicable for 2016.  Forfeitures can only be used to offset QNECs and QMACs allocated for plans years 2017 and later.  For example, if you are making safe harbor contributions on a per payroll basis, you can start using forfeitures to offset these contributions now. 

[austin3515]

Tom, what do you think?  Are they being too restrictive?

[Tom Poje]

I learned a long time ago, If a man is alone in a forest and he speaks, is he still wrong? that the answer was YES (and I'm not even married).

so it doesn't matter what I think. I hadn't even thought about the implications until someone raised the point, and at least the bell went off in the head that said take the trouble to ask the IRS before everything gets finalized. it could very well be the way things are written now it is true you can only use going forward rather than 'even though the allocation is for 2016, since it was actually allocated to the participants account in 2017 that is ok, and so maybe they will change things.

[DMcGovern]

The proposed regs say it is effective for taxable years after the publication of the final regs.  I'm guessing it is the taxable year for the plan?  So for calendar year plans, 1/1/17, right?  Non-calendar year plans?

[RatherBeGolfing]

4 minutes ago, DMcGovern said:

The proposed regs say it is effective for taxable years after the publication of the final regs.  I'm guessing it is the taxable year for the plan?  So for calendar year plans, 1/1/17, right?  Non-calendar year plans?

The proposed regs also say (my emphasis in italics)

Quote

These regulations are proposed to apply to taxable years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers, however, may rely on these proposed regulations for periods preceding the proposed applicability date. If, and to the extent, the final regulations are more restrictive than the rules in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.

 

[Kevin C]

I have to wonder if FT W is reading the same proposed Regs we are.  For calendar year plans, the proposed effective date will be no earlier than 1/1/2018.  However, it clearly says the proposed regs can be relied on for prior periods.  

 

Proposed Effective/Applicability Date

 

 

These regulations are proposed to apply to taxable years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers, however, may rely on these proposed regulations for periods preceding the proposed applicability date. If, and to the extent, the final regulations are more restrictive than the rules in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.

 

 

 

 

[RatherBeGolfing]

3 minutes ago, Kevin C said:

 

I have to wonder if FT W is reading the same proposed Regs we are.  For calendar year plans, the proposed effective date will be no earlier than 1/1/2018.  However, it clearly says the proposed regs can be relied on for prior periods.  

 

Yep that is my issue with  the FTW interpretation as well but they have been very firm on it both in my correspondence with them and the technical update. Unfortunately most of the 2016 work will be done by the time the IRS will issue an answer to the comments so we are kinda stuck it seems...

[austin3515]

hey man, I relied on a good faith interpretation!

[Kevin C]

Any ERISA attorneys out there?  Can an interim amendment reflecting a change in regulations be applied retroactively if the regulation says it can be applied retroactively?

[Tom Poje]

I believe FT William stance is: something like

the regs are eventually going to be approved in 2017.

but even though they aren't approved yet, you can rely on them for 2017.

those are the prior periods referred to rather than any prior period including those before 1/1/2017.

I assume the FT document folks are ERISA Attorneys!

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

I suspect the evil Austin has probably gone out to the IRS website and suggested they scrap the whole thing since we can't agree on an interpretation.

[DMcGovern]

FTW's responses to my questions regarding the effective date:

1. Is that the plan’s taxable year, or the employer’s?
ANSWER:  The Plan
2. For calendar taxable years, that would be 1/1/17? (So, a sponsor could use forfeitures toward the full 2017 safe harbor contributions.)
ANSWER:  Yes
3. What about non-calendar taxable years?
ANSWER:  It would be the tax year that starts in 2017.

Since the proposed Regs state they are effective for taxable years on or after the date they are published, that would include 2017, right?

[austin3515]

Quote

I suspect the evil Austin has probably gone out to the IRS website and suggested they scrap the whole thing since we can't agree on an interpretation.

Are you kidding, I am just thrilled with what they have done.  Hats off to the IRS!

But the point here is that an amendment is not required.  The document already says that contributions required to be nonforfeitable when made cannot be used.  One could easily argue that sentence simply means something different today than it did last week.  That would be one argument.  The other to me clearly is just that I used the forfeitures in 2017.

[Kevin C]

I wasn't implying that the FTW document folks were not ERISA attorneys.  We have their opinion.  I was asking if any of the ERISA attorneys on this site would care to comment.

 

The phrase " for periods preceding the proposed applicability date" can also be interpreted to mean including years back to 2006 when the ridiculous language of "when deposited" became effective.  While the controversy didn't start until about 2011, our plan provisions were not following the regulations from 2006 through the PPA restatements.  I read the proposed reg as correcting this issue back to 2006. Others obviously have a different opinion.  

[Kevin C]

23 minutes ago, DMcGovern said:

Since the proposed Regs state they are effective for taxable years on or after the date they are published, that would include 2017, right?

You left out a word.  They are proposed to be effective for taxable years beginning on or after the date the final regs are published.  For calendar year taxable years, that won't be before 2018.

[Tom Poje]

I can understand it either way, but then that is why it was important to ask the IRS. usually when the final regs are released in the preamble there will be a note "Some commentators asked if these regs apply only plan years beginning 2017" or something similar to that and they will answer the question.

so feel free to go out and ask for a clarification as well!

[austin3515]

Someone mentioned the obvious point which is we need to choose a course of action today.  The official answer in October is as useless as a $3 bill.  I hope Relius comes out with a more reasonable interpretation than FT, or at least says something like " some practioners might take the position that..." which to me is saying (albeit with a wink and a nod) that they think it is strong enough to be reasonable even if they don't want to be responsible for defending it.

[MoJo]

Always best to go to the source.  The explanation of the proposed regs say (verbatim) in the Proposed Effective/Applicability Date" section:  

These regulations are proposed to apply to taxable years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers, however, may rely on these proposed regulations for periods preceding the proposed applicability date. If, and to the extent, the final regulations are more restrictive than the rules in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.

First, I read the first part of that to say that WHEN FINAL, the regulations will apply only to taxable years beginning after publication.  So, if they are finalized in 2017, that would be 1/1/18.  Simple enough.

The part after the "however" says we can rely on these "proposed regulations" (without subsequent consequences if the final regs differ from the proposed) for "periods preceding" (emphasis added) the proposed effective date.

Now, words have meanings and "legal" interpretation says you use the ordinary meaning of words when interpreting them (unless the context requires otherwise).  The proposal talks about "periods" preceding the effective date (i.e. it uses the plural) and it does not restrict those "periods" to only those occurring coincident with (2017) or after publication of the proposed regs.  In other words, literally read, it could apply to any periods all the way back to the big bang.

I'm not advocating any position here - we are still evaluating how this applies (or how we want it to apply) to our book of business, but an argument certainly can be made that you can rely on the proposed regulations for periods in the past - such as a 2016 contribution that has not yet been funded (to the extent there isn't some other prohibition against the underlying act of funding a contribution to the past period).

I consider myself a "recovering" ERISA attorney (I work in-house with a service provider and not as part of the corporate legal department).

[John Feldt ERPA CPC QPA]

This would be an optional interim amendment - discretionary, not mandatory. The IRS can argue that plans could retain their existing restrictions on forfeitures if they wanted (crazy, I know).

But are we suggesting that later this year an optional interim amendment can be adopted, and that amendment could have a retroactive effective date of January 1, 2016? That would allow sponsors to ignore the current written language in the document that existed in the plan as of 12/31/2016 for the 2016 plan year. Do you believe this also allows a plan sponsor to ignore the rule that requires discretionary amendments to be adopted by the last day of the plan year?

Is there regulatory precedence?