Forfeitures before ACP or after ACP

[Purplemandinga]

If the employer over matched on deferrals because they got the formula wrong are the excess matching contributions fortified before ACP test is run or are they included in the ACP test? I read somewhere they are possibly excluded from the ACP testing and included in the general test. Yeesh. Any clarification would be appreciated, I feel like I'm making this more difficult than it actually is.

[justanotheradmin]

I would probably view those amounts as incorrect deposits. Not necessarily match, or non-elective or anything specific, until the terms of the plan are used. 

So the plan has extra deposits (that might be coded as match at a recordkeeper- but they might not be match) - what does the employer want to use them for? Does the plan allow for an additional discretionary match on top of whatever fixed match you say they exceeded? Does the plan allow for nonelective / profit sharing? 

Once the plan decides what the extra money is - and the amounts are calculated and allocated - then you run the ACP test using whatever amounts are accrued (not necessarily what is actually in people's accounts - since adjustments between participants might be necessary). 

And I would not refer to them as forfeitures. They aren't. 

[Purplemandinga]

Other allocation options are available under the plan but what if the sponsor wishes to just sit on them through forfeiture until next year? Can we just forfeit them prior to the ACP test?

[justanotheradmin]

They can't just sit on them.  There are other threads on this topic - money deposited to the trust by the end of the plan year MUST be allocated and cannot be carried forward. 

True forfeiture (non-vested money) is an exception to this rule. 

So if an employer deposits more than they intended - it has to be allocated as SOMETHING unless all participants are at their 415 maximum. 

[BG5150]

This is addressed in EPCRS.  It's an excess allocation.  Somebody got too much match.  The correction?  Simple.  Remove the excess amounts, adjusted for earnings, to a suspense account (usually the forfeiture account under the plan.  But as jaa said, these are not "forfeitures").  EPCRS calls this an "unallocated account".  The money in the suspense account must be used to offset the next ER contributions.  In fact, no ER contributions can come from the ER until that account is exhausted.  Excess amounts are disregarded for 415, 402(g), ADP & ACP tests.

Section 6.06(2) of EPCRS.  Relevant section spoiler'd below.

 

(2)

Correction of Excess Allocations. In general, an Excess Allocation is corrected in accordance with the Reduction of Account Balance Correction Method set forth in this paragraph. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for Earnings). If the Excess Allocation would have been allocated to other employees in the year of the failure had the failure not occurred, then that amount (adjusted for Earnings) is reallocated to those employees in accordance with the plan’s allocation formula. 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. While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals. Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant. For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of §§ 402(g) and 415, the ADP test of § 401(k)(3), and the ACP test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee’s after-tax contributions (adjusted for Earnings) and then the unmatched employee’s elective deferrals (adjusted for Earnings). If any excess remains, and is attributable to either elective deferrals or after-tax employee contributions that are matched, the excess is apportioned first to after-tax employee contributions with the associated matching employer contributions and then to elective deferrals with the associated matching employer contributions. Any matching contribution or nonelective employer contribution (adjusted for Earnings) which constitutes an Excess Allocation is then forfeited and placed in an unallocated account established for the purpose of holding Excess Allocations to be used to reduce employer contributions in the current year and succeeding year. Such unallocated account is adjusted for Earnings. While such amounts remain in the unallocated account, the employer is not permitted to make contributions (other than elective deferrals) to the plan.