New IRS Guidance Provides Welcome News for Many Safe Harbor 401(k) Plans


On January 18, the IRS published a proposed regulation for which many sponsors of safe harbor 401(k) plans have been waiting. The proposed regulation helpfully expands the permissible uses of forfeitures in such plans.

As background, safe harbor 401(k) plans are deemed to satisfy certain nondiscrimination tests that compare deferrals and matching contributions of highly compensated employees (generally, employees who earn more than $120,000.00) to deferrals and matching contributions of nonhighly compensated employees. To be deemed to satisfy those tests, the plan must satisfy certain employer contribution requirements, distribution requirements, and vesting requirements.  With respect to the employer contribution requirements, most safe harbor designs require employer contributions to be fully vested immediately.  For several years the IRS has taken the position that forfeitures in a safe harbor plan cannot be used to defray the cost of safe harbor employer contributions. The rationale for that position was as follows: safe harbor employer contributions must be fully vested when they are contributed to the plan, but forfeitures were not fully vested when originally contributed to the plan.

Fortunately, these proposed regulations reverse that IRS position by providing that employer contributions will qualify as safe harbor employer contributions if they satisfy applicable vesting and distribution requirements at the time they are allocated to participants’ accounts, even if such employer contributions did not satisfy those requirements when they were originally contributed to the plan. Also, although this will not become effective until taxable years beginning on or after the date that the final regulations are published, these proposed regulations can be relied upon immediately.  (If the final regulations are more restrictive than the proposed regulations, then the more restrictive provisions will not be applied retroactively.)

Note that many plans will have to be amended to take advantage of this new rule. Thus, sponsors of safe harbor 401(k) plans may wish to speak with their plan document provider and their ERISA attorney to discuss whether a plan amendment would be advisable in this regard.

You can access the proposed regulations via this link: