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New IRS Guidance Allows Plan Sponsors to Use Forfeitures for Safe Harbor Contributions, QNECs and QMACs


Earlier this year, the IRS released proposed regulations which permit employers to use forfeitures to fund safe harbor contributions, QNECs and QMACs.

In Depth

Under existing Internal Revenue Service (IRS) regulations, qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) and certain safe harbor contributions must be nonforfeitable (100 percent vested) at the time the amounts are contributed to an employer’s plan. Until now, the IRS has interpreted this requirement to prohibit employers from using forfeitures to fund QNECs, QMACs and certain safe harbor contributions. According to the IRS, using forfeitures for this purpose was impermissible because contributions allocated to a plan’s forfeiture account were subject to a vesting schedule when the contributions were first made to the plan (as employer matching or profit sharing contributions). As result, the IRS took the position that forfeitures could never be used to fund QNECs, QMACs or certain safe harbor contributions even if the forfeitures were fully vested at the time they were ultimately re-allocated to participant accounts as QNECs, QMACs or safe harbor contributions. 

The proposed regulations clarify that QNECs, QMACs and safe harbor contributions must be fully vested only at the time the contributions are allocated to participant accounts, rather than when first contributed to the plan. Although the regulations are proposed, they can be relied upon immediately, which means that forfeitures may now be used to fund such contributions. 

This is a welcome change for employers, who will now be able to use existing forfeitures to fund corrective contributions and safe harbor contributions, rather than making additional contributions to the plan for that purpose. However, before employers begin using forfeitures to fund QNECs, QMACs or safe harbor contributions, it is important that employers review their plan documents carefully to ensure that the plans allow forfeitures to be used to reduce employer contributions and do not otherwise prohibit the use of forfeitures to fund QNECs, QMACs and/or safe harbor contributions.

© 2020 McDermott Will & Emery


About this Author


Lisa Loesel focuses her practice on employee benefits matters, including the design, amendment and administration of pension and 401(k) plans, nonqualified deferred compensation arrangements, and employee stock ownership plans. She counsels privately and publicly held corporations regarding the employee benefits design and transition matters arising from corporate mergers, acquisitions and divestitures. She also advises clients regarding fiduciary and plan investment issues under the Employee Retirement Income Security Act of 1974 (ERISA). Lisa also has experience counseling plan...


Sarah Engle* is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. She focuses her practice on employee benefits matters.

Sarah counsels clients regarding a variety of employee benefits matters, including the design, drafting and operation of tax-qualified pension and profit sharing plans, health and welfare arrangements, and deferred compensation plans.

She is experienced advising clients on employee benefits design, implementation and transition matters arising in connection with corporate mergers and acquisitions, and advises companies on regulatory compliance with the Internal Revenue Code, ERISA, HIPAA, COBRA, PPACA, and related state and federal laws affecting employee benefit plans.

Sarah also has particular experience helping clients address compliance issues related to the administration of their employee benefit plans and has represented clients in matters before the Internal Revenue Service (IRS), Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC).

Sarah received her J.D. in 2010 from University of Pittsburgh School of Law, where she was articles editor for the University of Pittsburgh Law Review. She earned her B.S. in 2007 from Indiana State University.

Sarah is admitted to practice in Pennsylvania.

*Not admitted to practice in Illinois. Supervised by principals of the Firm who are admitted to the Illinois bar.

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