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IRS Finalizes Regulations Allowing Plan Forfeitures to Fund QNECS and QMACS

The IRS recently finalized regulations that allow 401(k) plans to use forfeiture money to fund qualified non-elective contributions (“QNECs”) and qualified matching contributions (“QMACs”).  These regulations finalize proposed regulations issued last year (you can read our prior coverage of the proposed regulations here).

By way of background, QNECs and QNECs are types of employer contributions used by many 401(k) plans to help pass annual nondiscrimination testing (also known as ADP and ACP testing).  QNECs and QMACs are also used by safe-harbor 401(k) plans, which are automatically deemed to pass the ADP and ACP tests if certain requirements are followed.  QNECs and QMACs cannot be subject to a vesting schedule, which means that participants are fully vested in those contributions when allocated to them.

Prior to issuing the proposed regulations last year, plans could not use money in the plan’s forfeiture account to fund QNECs and QMACs.  This is because prior regulations required that QNECs and QMACs be non-forfeitable when contributed to the plan.  There is no way that money in a forfeiture account would be vested when contributed to the plan (because it is money that a participant forfeited for not satisfying the vesting schedule), so the IRS has long held the position that forfeiture money could never be used to fund QNECs or QMACs.

The final regulations change the requirements to provide that QNECs and QMACs must be vested when allocated to participants.  This means that unvested money in the plan’s forfeiture account can fund QNECs and QMACs, as long as those contributions become vested when allocated to participants.

The new regulations apply to plan years ending on or after July 20, 2018.  However, plans have been allowed to rely on the relaxed restrictions of the new rules since the proposed regulations were issued last year.  Keep in mind that these changes are permissive, so plans need not be amended to allow for these relaxed restrictions if the plan will not use forfeitures in this way.  However, plans that want to begin using forfeiture money to fund QNECs and QMACs may need to be amended, since the plan may still contain language stating that QNECs and QMACs cannot be funded from the plan’s forfeiture account.

Jackson Lewis P.C. © 2018

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About this Author

Associate

Joshua Rafsky is an Associate in the Chicago, Illinois, office of Jackson Lewis P.C. His practice focuses on various aspects of employee benefits law and executive compensation, including ERISA and the Internal Revenue Code.

Mr. Rafsky has extensive experience in the design, implementation and compliance of qualified retirement plans. He also has experience with health and welfare plans, executive compensation, and the benefits issues present in mergers and acquisitions. 

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