January 20, 2017
Authored by: Sarah Bhagwandin and Chris Rylands
On January 18, 2017, the IRS issued proposed regulations allowing amounts held as forfeitures in a 401(k) plan to be used to fund qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs). This sounds really technical (and it is), but it’s also really helpful. Some plan sponsors of 401(k) plans use additional contributions QNECs and/or QMACs to satisfy nondiscrimination testing. Before these proposed rules, they could not use forfeitures to fund these contributions because the rules required that QNECs and QMACs be nonforfeitable when made (and also subject to the same distribution restrictions as 401(k) contributions). If you have money sitting in a forfeiture account, then by definition it was forfeitable when made, so that money couldn’t possibly have been used to fund a QNEC or QMAC.
The proposed regulations provide that amounts used to make these contributions must satisfy the vesting requirements and distribution requirements applicable to 401(k) contributions when they are allocated to participants’ accounts rather than when they are contributed to the plan. The regulations are only proposed, but the IRS has said taxpayers may rely on them. If the final regulations turn out to be more restrictive, then those restrictions will only apply after the regulations are finalized.
Going forward, plan sponsors wishing to apply amounts held in forfeiture accounts to fund QNECs and QMACs under the 401(k) plan should review their plan document provisions. The plan should at a minimum allow forfeitures to be used to make employer contributions and not prohibit their use to fund QNECs and QMACs. Plan sponsors may wish to amend the document to clarify that “employer contributions” will include allocations made as QNECs and QMACs.