The Washington regulatory machine has certainly been very busy over the last 12 months. Some of what they have been doing is good for employers and their employees; some of it is not. For example, consider the recent rule changes proposed by the IRS that would essentially rewrite the current rules for 401(k) plan forfeitures. The rules look to be a very good thing if they are eventually published as currently written.
Under current regulations, plan sponsors are restricted in what they can do with retirement plan forfeitures. Under the proposed rule changes, sponsors could use forfeited funds as safe harbor contributions. This could play out in one of several different ways depending on the individual forfeiture and the circumstances surrounding it.
For the record, forfeitures within 401(k) plans relate to non-vested funds currently dedicated to the retirement plans of terminated members. Because those funds are not vested, they do not belong to the terminated employee. But a company cannot simply take the money and do anything it wants with it.
The new rules proposed by the IRS accomplish two things:
1. Redefine Key Terms
First, the rules would redefine both qualified matching contributions (QMAC) and qualified non-elective contributions (QNEC) under 401(k) retirement plans that include employee contributions or matching employer contributions under Section 401(m). Redefining the terms is necessary to clarify how employers can use non-vested funds as safe harbor contributions.
Redefining the terms would free up certain funds as long as these met the qualifications under the new rules, even if the money in question was contributed prior to the rules being published. In other words, it would be retroactive. Companies would be able to reallocate funds for safe harbor purposes as soon as the rules officially went into effect.
2. Create More Options for Funds
The second thing the new rules do is provide four options for using forfeited funds. Those options are as follows:
- Restoring accounts that were previously forfeited;
- Paying 'reasonable' expenses incurred by retirement plan maintenance;
- Distributing funds among current plan participants as additional contributions; and
- Using the money to reduce future contributions by current plan members.
The only one of the four options that does not seem to make a lot of sense is the first. If you have forfeited funds due to an employee's termination – whether that termination is voluntary or involuntary – the likelihood of restoring the person's account does not seem high. But having the provision in place does make it impossible on the outside chance it becomes necessary.
Your Company 401(k) Plan
New rules proposed by the IRS give us an opportunity to ask our readers the following question: what is your company 401(k) plan like? If you already have a plan in place, is it one that maximizes returns for employees by offering limited fees and high performance investment options? If not, it might be time to start shopping for an alternative.
If you do not have a 401(k) plan in place, we want to encourage you to consider a solution from BenefitMall. We partner with a well-known investment specialist to provide unique retirement plan options for our clients. We believe a 401(k) plan is one of the best benefits companies can offer in order to remain competitive in the modern era.
A retirement plan does not have to be prohibitively expensive. With our creative and customizable solution, you can offer your employees a 401(k) plan they are sure to appreciate for as long as they work for you. If you want more information, you need only contact us at your earliest convenience.