Deductibility of match forfeitures.

[Guest]

A 401k plan only provides salary deferrals and match. The employer deposits matching contributions quarterly. And, the plan contains a 500 hours of service requirement to be eligible to receive the match. If at the end of the plan year, there are extra matching contributions forfeited due to the hours requirement (but the employer deducted these amounts on his tax return), does this result in a nondeductable contribution subject to the 10% excise tax?

[rcline46]

If there are rules to be eligible for a contribution, such as 500 hours, end of year, 1000 hours, then NO contribution should be deposited until those qualifications are met. What does the document say about 'ineligible' participants? If it says to forfeit, then forfeit and allocate per document. If the contribution did not exceed the 15% limit, IT IS DEDUCTABLE. If you are very brave you might try mistake in fact and it goes back into income.

[Guest]

Thanks for the reply. The document doesn't address funding for ineligibles. What did you mean by back into income?

[Richard Anderson]

I believe the answer in general is yes.

But, if someone gets a match in the first quarter of the plan year, then terminates in the second quarter with 500 or fewer hours; I see no reason that you could not forfeit his contribution immediately and use that amount to fund the second quarter's match amount. If you do that for each quarter, or at least before the final quarter's contribution is made; you may not have any non-deductable contribution at plan year end.

But, if you make all quarter's contributions first, and then forfeit at the end of the year those with 500 or fewer hours, you will have contributed an amount that is more than can be allocated to participants. That excess is non-deductible and subject to the excise tax.

[rcline46]

If the return is due to a mistake in fact, and it is after the tax return is filed, the the sponsor must take it in as income.

I disagree that it is a non-deductible contribution subject to excise tax unless it is over the 15% limit. It is an additional match or a forfeiture to be allocated. Now if the match is 'locked in' (very dumb thing to do in a document) then it must be a mistake in fact (bad calculation).

[Richard Anderson]

Rcline46 is correct, I don't know what I was thinking. If the match is discretionary, then the amount deposited in the account of a participant who does not meet the requirements for that contribution should be considered additional match and allocated to those eligible for the match.

But, if the employer waits to deposit the match for the last quarter until it is known who has not met the 500 hour requirement, the "forfeited" amount can be used to fund the last quarter's match.

If the employer wants to deposit the match quarterly, the best thing to do is to amend the plan to have no hours requirement for the match.

[rcline46]

Richard, don't feel bad. I would not want to count the times my brain fogged over when responding to questions!