In an August 24, 2010, telephone forum for retirement plan practitioners, the employee plans voluntary compliance program coordinator at the Internal Revenue Service (IRS), Avaneesh Bhagat, indicated that employers will no longer be permitted to use forfeitures to correct certain types of retirement plan operational errors. The voluntary correction program is set forth in Revenue Procedure 2008-50 and permits employers to correct certain plan errors through self-correction or with IRS approval.
Qualified nonelective contributions, or QNECs, must be made to a plan to correct certain types of operational errors, whether an employer is using a self-correction method or requesting IRS approval. QNECs are defined in Department of Treasury regulations as employer contributions that are fully vested when made. Mr. Bhagat indicated that because forfeitures by their nature are not fully vested when contributed to a plan, they cannot be treated as QNECs. Of primary interest to employers is Mr. Bhagat's conclusion that since forfeitures are not QNECs, they can't be used to correct a failed nondiscrimination test under Internal Revenue Code section 401(k) (referred to as the ADP test), since the relevant Treasury regulations require that contributions used to correct such failures be QNECs. Mr. Bhagat indicated that forfeitures can still be used to correct other operational errors under the voluntary compliance program, such as the inadvertent exclusion of one or more employees from participation in a retirement plan, if the plan document permits such an allocation.
Mr. Bhagat indicated that an update to Revenue Procedure 2008-50 describing the voluntary compliance program is in progress. The new Revenue Procedure is expected to clarify this point.