On January 18th, the IRS provided the retirement plan community with a belated holiday gift in the form of proposed regulations that permit forfeitures to be used to fund safe harbor contributions, QNECs, and QMACs. This guidance reverses the IRS’s relatively recent (and many would argue, strained) interpretation of statutory language to require that such contributions be nonforfeitable at the time they are contributed to a plan.
As a result of this interpretation, the IRS required language be included in PPA documents that precludes the use of forfeitures to fund safe harbor contributions. Many plan sponsors and administrators faced challenges when working with plans in which forfeitures existed, but which only intended to fund safe harbor contributions. This was particularly problematic for plans attempting to use the top-heavy exemption. Plans are exempt from the top-heavy rules if they consist solely of deferrals and safe harbor contributions. If any forfeitures are reallocated to participants (rather than reduce the safe harbor contribution) then the top-heavy exemption is lost. This proposed regulation would allow the forfeitures to be used to reduce the safe harbor contribution thereby allowing the plan to continue to be exempt from the top-heavy rules.
The proposed regulations will amend Treas. Reg. §1.401(k)-6 to provide that QNECs and QMACs, and by extension safe harbor contributions, must be nonforfeitable when they are allocated to participant accounts, rather than at the time they are contributed to the plan. The proposed regulations also coordinate the definition of QNECs and QMACs to provide a consistent definition throughout the regulations.
The IRS has opened a comment period on the proposed regulations through April 18th. The regulations will become effective for taxable years beginning on or after the date that the final regulations are published, however, the IRS has provided that proposed regulations may be relied upon immediately. If the final regulations are more restrictive than the proposed regulations, the more restrictive provisions will not be applied retroactively.
It is important to note that to apply these changes, plan documents will need to be amended to remove the language that restricts the use of forfeitures to fund safe harbor contributions. FIS Relius will be preparing good-faith amendments for this purpose in the near future. Since this change is discretionary, an amendment would need to be adopted by the last day of the plan year to which it applies. In addition, an earlier amendment might be needed to avoid violating the anti-cutback rules (IRC §411(d)(6)) depending on how forfeitures are handled under a plan sponsor’s current plan. For example, if the plan provides for the reallocation of forfeitures, then amending the plan to reduce contributions could violate the anti-cutback rules if participants have already satisfied the conditions for sharing in the reallocation of the forfeitures.
This is a very favorable change for plan sponsors and it is clear that the IRS has listened to feedback from practitioners and plan sponsors. When coupled with the guidance issued in 2016 that permits mid-year amendments to safe harbor plans in most circumstances, it would appear that the Service is working to make safe harbor 401(k) plans an attractive option for employers.
We will discuss this issue at the Orlando Advanced Pension Conference, February 1-3. See below for details.
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Orlando APC – Hard Rock Hotel® at Universal Orlando®. – Feb. 1-3, 2017
It is not too late to register!
Earn up to 19 hours of CE credits.
View the program complete Agenda and register online.
Just for ERPAs Workshop – Jan. 31 – Deep Discount for APC Attendees
Earn up to 8 hours of ERPA credit, including 2 ethics hours. Pay only $250 for the workshop when you register for both the APC and the ERPA workshop. See agenda and register online.
Live Web Seminars
401(k) BB 13: Distribution Restrictions, Hardships, 2/6, 12:00 PM ET
401(k) BB 14: Participant Loans: The Fine Print, 2/13, 12:00 PM ET
401(k) BB 15: All About Roth, 2/15, 12:00 PM ET
For more details about these programs, and to register online: www.relius.net/events/events.aspx?Web
Pensions on Peachtree – Atlanta, GA – April 24-25, 2017 – Save the Dates!
The professional educators at FIS are joining forces with the Ferenczy Benefits Law Center, LLP, based in Atlanta, to bring you their fourth annual conference. The conference will take place at the Atlanta Marriott Century Center/Emory Area, in Atlanta, GA. Program details and online registration will be available in February 2017, here.
Private On-site Seminars – Lock in Your Dates for 2017, Now!
ERISA expert speakers will come to the location of your choice and present a program customized to meet the educational needs of your retirement plan professionals and staff. For more information, visit our website: http://www.relius.net/Products/seminaronsite.aspx. Email inquiries to relius.education@sungard.com. |
