September 13, 2018

Recent IRS Guidance Impacting Defined Contribution Plans

By Karen E. Gelula and Cristin M. Obsitnik

Below, we’ve gathered some recent IRS guidance – both formal and informal – that impacts the design and administration of defined contribution plans. Read on for more information about:

  • Final regulations allowing forfeitures to be used to fund QNECs, QMACs and safe harbor contributions.
  • Private Letter Ruling 201833012, which concerns a 401(k) plan benefit tied to student loan repayment.
  • Updated model schedules to be used for Voluntary Correction Program (VCP) submissions, effective immediately.

Use of Forfeitures to Fund QNECs, QMACs and Safe Harbor Contributions

Historically, forfeitures could not be used to fund qualified matching contributions (QMACs), qualified nonelective contributions (QNECs), or safe harbor contributions to a defined contribution plan because forfeitures are not nonforfeitable when made to the plan. Under regulations proposed in July 2017 and finalized in July 2018, the IRS changed the definition of QMACs and QNECs so that contributions are only required to be nonforfeitable when allocated to participants’ accounts. This change permits forfeitures to be used to fund QMACs, QNECs and safe harbor contributions, provided such use is consistent with the plan’s terms. The change is effective for plan years ending on or after July 20, 2018, although plan sponsors were previously entitled to rely on the change in the proposed regulations.

IRS Rules on 401(k) Plan Benefit Tied to Student Loan Repayment

Under what’s known as the “contingent benefit rule,” an employer cannot condition an employee’s other benefits (directly or indirectly) on the employee’s election to make deferral contributions to the employer’s 401(k) plan, subject to certain exceptions, such as matching contributions. A violation of the contingent benefit rule would cause the employer’s 401(k) plan to be disqualified.

An employer sponsors a 401(k) plan providing matching contributions equal to 5 percent of pay to employees who make elective deferral contributions of at least 2 percent of pay. The employer proposed adding the following “student loan program” to the plan. If an employee enrolls in the program and makes a student loan repayment of at least 2 percent, the employer will make a nonelective contribution equal to 5 percent of pay to the plan, regardless of whether the employee makes elective deferral contributions. A program participant who does not make the required student loan repayment will receive true-up matching contributions, if the employee makes elective deferral contributions of at least 2 percent of pay. The nonelective contribution and any true-up matching contributions (which are subject to the same vesting schedule as regular matching contributions) will be made only if the employee is employed on the last day of the plan year.

In Private Letter Ruling 201833012, the IRS held that this student loan program does not violate the contingent benefit rule because (i) the nonelective contribution is conditioned on whether an employee makes a student loan repayment, not on the employee making elective contributions to the plan, and (ii) an employee enrolled in the student loan program is still permitted to make elective contributions to the plan. In addition, the ruling is based on the assumption that the employer will not extend any student loans to employees who will be eligible for the program.

While private letter rulings are not precedential and can only be relied upon by the taxpayer to whom the ruling is issued, this ruling does provide guidance on the position the IRS would likely take with respect to a similar student loan repayment program.

Revised Voluntary Correction Program (VCP) Forms

On June 29, 2018, the IRS released new versions of some of the model Voluntary Correction Program (VCP) schedules which can be used to file a VCP submission of a qualified retirement plan under the Employee Plans Compliance Resolution System. Specifically,

  • Form 14568-B: Other Nonamender Failures and Failure to Adopt a 403(b) Plan Timely was revised to correspond to the changes in the determination letter submission process.
  • Form 14568-E: Plan Loan Failures (Qualified Plans and 403(b) Plans) was revised to remove an unnecessary enclosure item.
  • Form 14568-H: Failure to Pay Required Minimum Distributions Timely was revised to remove an unnecessary enclosure item.

The revised Forms are intended to be used immediately. The IRS also has indicated that it is in the process of revising other VCP forms to reflect the current fee schedule for VCP applications (i.e., fees based on plan assets, not participant count).

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