As explained in the February, 2017 edition of The Speed Reader, last year the IRS published proposed regulations that helpfully expanded the permissible uses of forfeitures in retirement plans. On July 20, 2018, the IRS finalized those regulations.
One effect of the final regulations concerns safe harbor 401(k) plans. Such 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. For several years before the 2017 proposed regulations were published, the IRS took the position that forfeitures in a safe harbor plan could not 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 a safe harbor 401(k) plan, but forfeitures were not fully vested when originally contributed to a plan.
Fortunately, consistent with the proposed regulations, the final regulations reverse that IRS position. Specifically, employer contributions will now 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.
Like the proposed regulations, these final regulations also apply when an employer wishes to use a plan’s forfeiture account to fund qualified nonelective contributions (“QNECs”) and qualified matching contributions (“QMACs”) to correct nondiscrimination testing failures and to fund corrective contributions (e.g., for participants who were not timely notified of their plan eligibility). Thus, the final regulations will also prove helpful to many sponsors and administrators of 401(k) plans that are not safe harbor plans.
These final regulations state that they apply to plan years beginning on or after July 20, 2018, but that plan sponsors and administrators can apply these regulations to earlier periods. (That is consistent with the fact that the proposed regulations could be relied on immediately upon their publication on January 18, 2017.)
Note that many plans will have to be amended to take advantage of these regulations. Thus, sponsors of 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.
Here is a link to the final regulations: https://www.gpo.gov/fdsys/pkg/FR-2018-07-20/pdf/2018-15495.pdf