ADP Retirement Services

Regulatory Update

The Use of Forfeitures to fund Safe Harbor Contributions, QNECs and QMACs

On January 18, 2017, the Internal Revenue Service (IRS) proposed regulations that would permit forfeitures to be used to fund safe harbor contributions, QNECs, and QMACs. This guidance reverses the IRS's prior position that such forfeitures could not be used since the contributions were not "nonforfeitable" at the time they were contributed to the plan.

Many plan sponsors have had challenges when forfeitures existed, but the only employer contributions are safe harbor contributions. This would also present issues for plans wanting to take advantage of the top-heavy exemption. Safe Harbor plans are exempt from the top-heavy rules if they consist solely of deferrals and safe harbor contributions, so reallocating the forfeitures as an additional employer contribution could cause the plan to lose the Top heavy exemption. This proposed regulation would allow the forfeitures to be used to reduce the safe harbor contribution thereby allowing the plan to continue to be exempt from the top-heavy rules.

The proposed regulations will amend the regulations to state that safe harbor contributions, must be nonforfeitable when they are allocated to participant accounts, rather than at the time they are contributed to the plan. These regulations are proposed to apply to taxable years beginning on or after the date that the regulations are published in final form, however, the IRS has provided that proposed regulations may be relied upon immediately. If the final regulations are more restrictive than the proposed regulations, the more restrictive provisions will not be applied retroactively.

This change is welcome news to many plan sponsors. It is important to note that to apply these changes, plan documents may need to be amended to allow for the use of forfeitures to offset safe harbor contributions. ADP Retirement Services is currently revising its operational practices to accommodate the change in the regulations and will be set to assist you in implementing these changes in the near future. Be on the lookout for additional information as new procedures are rolled out.

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