On January 18, 2017 the IRS issued proposed regulations that allowed for permitted uses of plan forfeitures in a 401(k) plan. Under these proposed rules, “Qualified Nonelective Contributions, or QNCEs and “Qualified Matching Contributions” or, QMACs would be amended to allow plan sponsors to use amounts held in the plan’s forfeiture account to fund QNCEs, QMACs and safe harbor 401(k) contributions. The proposed regulation would make it easier for plan sponsors of 401(k) plans to meet the requirements for nondiscrimination for both employee salary deferral contributions and employer matching contributions.
In order to satisfy the employee salary deferral contribution or employer matching contributions tests, one of the options for correcting the failed test is for the plan sponsor to make QMACs or QNECs to pass the respective tests. Existing regulations provide that employer contributions may only qualify as safe harbor contributions, QNECs, or QMACs, if they are non-forfeitable and not eligible for early distribution at the time they were contributed to the plan. This position limited plan sponsors’ ability to use forfeitures to fund QMACs and QNECs, as forfeited amounts most often arise from employer contributions that are not truly vested at the time in which they are initially contributed to the plan.
The new proposed regulations, which may be relied upon currently, would instead require that QNECs, QMACs, and safe harbor contributions be non-forfeitable and not eligible for early distribution at the time they were allocated to participants’ accounts.
Although President Trump issued a Presidential Memorandum directing federal agencies to delay the effective date for at least 60 days of published regulations that had not yet taken effect as of the date of the memorandum, the IRS has stated that plan sponsors may rely upon the proposed regulation as of publication date.
