​IRS Finalizes Regulations Around Forfeitures Funding for QNECs and QMACs

August 2018

On July 20, 2018 the IRS finalized regulations that allow forfeitures from 401(k) plans to fund qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), which are frequently used to correct certain contribution testing failures. The final regulations follow the proposed regulations released on January 18, 2017 (82FR 5477).   These regulations apply to taxable years beginning on or after the date of publication of the final regulations however, plans may rely on the proposed regulations for periods preceding the proposed applicability date.

Forfeitures are generated when an employee is terminated before the employer’s contributions to their qualified retirement account have fully vested and cannot be returned to the employer.  Forfeitures must remain in the plan to be allocated under a forfeiture formula, used as an employer contribution or pay plan expenses.  However, under the prior rules, employers could not use forfeitures to fund QNECs and QMACs.  

QNEC and QMAC are commonly used by employers to correct testing failures where the rules that limit the disparity between average deferrals and matching contributions of highly compensated employees and non-highly compensated employees are not satisfied. Under the corrective contribution rules, QNEC and QMAC contributions must be fully vested which prohibited the reallocation of forfeitures as QNECs and QMACs since those amounts were not fully vested when contributed.

Under the new regulations, forfeitures can be used for QNECs and QMACs as long as the forfeitures are vested when allocated to the plan participants' accounts although they are not fully vested when contributed to the plan.  The use of forfeitures to fund QNECs and QMACs is a valuable expansion that plan sponsors and service providers had been advocating.  

Rules around QNECs and QMACs were also expanded by Congress through the Bipartisan Budget Act of 2018 (P.L. 115-123) passed in February 2018.  The funds eligible for a section 401(k) hardship withdrawal were broadened to include earnings on elective deferrals as well as QNECs, QMACs, and the associated earnings of both, elective for plan years after December 31, 2018.

These rules coupled with the relaxed hardship withdrawal rules from this year’s earlier budget bill, plan sponsorship becomes even more attractive to employers.
 

CONTACT:
 
Beth Garner
Assurance Partner
National Practice Leader, Employee Benefit Plan Audits
   Joan Vines
Managing Director
Exec. Compensation, Employee Benefits