Employers Get Increased Flexibility in Use of Retirement Plan Forfeitures

We have received questions from several members about a proposed plan amendment sent to them from their plan document provider, presumably out of the blue. They question what it means and whether they should adopt it for their plan. This is an optional plan amendment, not mandated by regulation, so there is no requirement to adopt it. Nevertheless, some providers of prototype and volume submitter plan documents have already adopted the amendment on behalf of their employer clients. For the rest of us, the short answer is, if your plan has any sort of a vesting schedule beyond 100-percent immediate, then it may well be worth adopting this amendment.

By way of background, earlier this year, the IRS published Proposed Regulations (Bulletin 2017-6) that offer increased flexibility to plan sponsors in how to use forfeitures. Forfeitures are monies that were in a participant’s account, but not yet vested. When a person terminates prior to vesting, the unvested money is removed from the participant’s account and returned to the plan to be held in a Forfeiture Account.

How may forfeitures now be used? Plans adopting an amendment before the end of their 2017 plan year may reallocate forfeitures in 2017 to any of these newly authorized uses:

  • When a 401(k) Actual Deferred Percentage (ADP) test is failed, and the plan does not want to return contributions to highly compensated employees (HCEs), forfeitures may be used to fund qualified non-elective contributions (QNECs). These are contributions to Non-Highly Compensated Employees (NHCEs) that must be 100-percent vested and counted in the ADP to increase the maximum amount HCEs can contribute.
  • When a plan fails the Actual Contribution Percentage (ACP) test and chooses not to return the excess company match to HCEs, forfeitures may be used to fund a qualified matching contribution (QMAC). QMACs operate much like QNECs, although the QMAC is used to improve the ACP test results, thereby allowing HCEs to keep excess matching contributions.
  • Safe harbor plans that by definition do not need to even conduct the ADP test may now use forfeitures to fund the safe-harbor employer contributions.

The regulations are proposed to apply to taxable years beginning on or after the date of publication in the Federal Register. We must wait for the Treasury Department to confirm these rules as final before publication. In the meantime, employer plans may rely on these proposed regulations for periods preceding the proposed applicability date. If the final regulations do turn out to be more restrictive than the rules in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.

Our ERISA services can assist individually designed employer plans that may benefit from adopting this amendment, or review proposed plan amendments for ERISA compliance.