As retirement plan advisors know, employer-sponsored plans contain retirement plan forfeitures, which are non-vested employer contributions of terminated participants. [1]
There are several ways that retirement plan forfeitures are utilized, and it’s important that plan sponsor-clients who serve in a fiduciary capacity understand these parameters.[2]
In January of 2017, the IRS proposed regulations that should be welcome news for plan sponsors—the ability to use plan forfeitures to fund safe harbor contributions.
Uses of Retirement Plan Forfeitures
According to Vanguard commentary, “Avoiding pitfalls in retirement plan forfeitures”, guidance provided by the Internal Revenue Service (IRS) suggests that plan forfeitures may be used in several ways. They are:
- Reducing future employer contributions;
- Paying reasonable retirement plan expenses;
- Allocating among participants as additional contributions; and
- Restoring previously forfeited participant accounts.
National Association of Plan Advisors notes that under this new proposal, the use of forfeitures would be expanded. The regulation would amend the definitions of qualified matching contributions (QMAC) and qualified non-elective contributions (QNEC) in 401k plans, and plans that provide for matching contributions or employee contributions under Section 401(m).
What it would specifically change is the classification of the definition by stating employer contributions would qualify as QMACs or QNECs if they are able to satisfy applicable “non-forfeitability” and distribution requirements when allocated to employee’s accounts, regardless of the fact they didn’t meet those requirements when originally contributed.
According to the IRS, this regulations would apply as of taxable years beginning on, or after, the date the regulations are published in their final form.
It’s is a significant proposed benefit for employers who utilize a safe harbor match (and still have a forfeiture balance) to exhaust those funds first, before cutting a check to cover the contribution.[3]
Derek Fiorenza is COO and CCO with Summit Group Retirement Planners, Inc. Summit Group Retirement Planners, Inc. specializes on collaborating with employers on the design, installation, and ongoing servicing needs of their retirement programs. For further information, please contact a Summit Group Retirement Planners representative at 267-433-1050 or dfiorenza@sgretirementplanners.com.
[1] “401k Plans for Small Businesses.” Dol.gov. October 2015.
[2] “Definitions of Qualified Matching Contributions and Qualified Non-elective Contributions.” Amazon.com/s3/. January 18, 2017.
[3] “Proposed Reg Would Free Up Forfeitures to Fund Safe Harbor Contributions.” Napa-net.org. January 20, 2017.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
