Some of our employer client sponsors of pre-approved 401(k) plans have contacted us regarding plan amendment notices received recently from their prototype or volume submitter plan document sponsors relating to the expanded use of forfeitures in their plans. An employer is informed either that an amendment has already been made for all employers that have adopted the plan form or requests or suggests that they adopt the amendment for their particular plan. The amendment specifically allows amounts in forfeiture accounts to now be used to fund qualified nonelective contributions (“QNECs”) and qualified matching contributions (“QMACs”) and, for safe harbor plans, to fund safe harbor plan contributions. Bottom line: the news is all good, and the amendment should be welcome and/or adopted for virtually all plans.
This mass amendment of plans stems from Proposed Treasury Regulations issued by the IRS in January of this year which reverse a multi-year position taken by the IRS to the effect that QNECs and QMACs had to be fully vested when first contributed to the plan, rather than when allocated to the accounts of participants. QNECs and QMACs are primarily used by non-safe harbor 401(k) plans to meet the ADP and ACP nondiscrimination tests for plans that do not use distributions of excess contributions to remedy a failed test. After much lobbying by benefits lawyers, actuaries and accountants, the IRS has finally accepted the view that the better reading of the Internal Revenue Code and the Treasury Regulations is that nonforfeitability conferred by the plan sponsor when such contributions are allocated to accounts is what matters. The new right to use forfeitures for QNECs and QMACs also extends to 401(k) safe harbor matching or nonelective contributions, which must also be fully vested when allocated. Taxpayers may rely on the regulations for periods preceding the date the regulations eventually become final. If the Final Regulations are more restrictive than the Proposed Regulations the Final Regulations will not be applied retroactively to create a noncompliance problem for any plan amended in reliance on the Proposed Regulations. Lingering remaining questions, however, are whether forfeitures could be used for safe harbor 401(k) contributions made for the 2016 year or even whether forfeitures arising in 2016 could be used in 2017. We are not aware that the IRS has yet clarified with any formal or informal comments.
Such an amendment is a discretionary plan amendment, meaning if the employer wants to reallocate forfeitures under the new regulations at a time in 2017 prior to making the amendmentthen it must adopt the amendment before the 2017 plan year end.
Finally, if you are an adopter of an individually-designed 401(k) plan, you will very likely wish to make this amendment to your plan.