ALERT: Forfeitures and Safe Harbor Contribution

After years of arguments with the IRS regarding the use of forfeitures to offset Qualified Non-Elective Contribution, (QNECs), Qualified Match Contribution, (QMACs) and Safe Harbor Contributions, the IRS has finally relented and agreed forfeitures can be used to offset these contributions.

The IRS announced their decision through the issuance of a proposed regulation. While the regulation is technically not effective until the regulation is finalized, Plan Sponsors may rely on the proposed regulation immediately.

According to the preamble to the proposed regulation, “Taxpayers… may rely on these proposed regulations for periods preceding (emphasis is added) the proposed applicability date. If, and to the extent, the final regulations are more restrictive than the rules in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.”

This decision is a welcome relief to Plan Sponsors and provides an added cost savings to the Retirement Plan. However, before Plan Sponsors begin to use those forfeiture funds, it is necessary to first review your plan document to see how forfeitures may be used.

Many pre-approved Adoption Agreements limited the use of forfeitures to reduce QNECs, QMACs and Safe Harbor Contributions. Therefore, the Plan will need to be amended if you intend to use forfeitures to reduce these contributions.

For pre-approved Plans, your document provider will need to issue an interim amendment, which must be executed by the end of the Plan Year for which the forfeitures are being used. This means if you intend to use forfeitures to offset your 2017 Safe Harbor contributions, the interim amendment must be signed by December 31, 2017.

We are pleased with this long awaited decision by the IRS. Plan Sponsors may now be able to use these funds to cover the contribution cost rather than having to fund additional money.

If you have any questions regarding your plan document, please feel free to contact our team.

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