GroupBuck_BondGroup

IRS Blesses Use of Forfeitures for QNEC/QMAC/Safe Harbor Contributions

by and Tags:

Volume 41 | Issue 53

pdf icon Download this FYI as a printable PDF

The IRS has finalized regulations that allow employers to use forfeitures as qualified nonelective and qualified matching contributions to help pass nondiscrimination tests and as safe harbor contributions. The change is effective for plan years beginning on or after July 20, but, as previously offered in IRS’ proposed regulation, can be relied on for earlier periods.

Background

As explained in our January 18, 2017 For Your Information, final IRS regulations had restricted the funding of Qualified Nonelective Contributions (QNECs), Qualified Matching Contributions (QMACs), and safe harbor 401(k) contributions to new employer contributions that were fully vested at the time they were contributed to the plan. This meant that forfeitures from the accounts of participants who were not fully vested could not be used as a source of funding for these amounts. Most constituents had assumed in practice that plan forfeitures used for contributions would be treated the same as new money deposited by the employer — as long as the nonforfeitability requirement and distribution limitations were met when allocated to participants’ accounts. IRS’ proposed rule signaled their acceptance of this rational view of the requirement. Those that did not make this assumption generally only used the forfeitures for the payment of plan expenses.

Final Rule Adopted Without Substantive Modification

In their final regulation, IRS affirms the ability to use forfeitures for these purposes. In response to comments, IRS offers guidance on how the anticutback rule would need to be addressed assuming the plan document requires an amendment to switch gears. The anticutback rule will not limit prospective amendments nor will it prohibit the change for plans that normally allocate forfeitures to all eligible participants at the end of the plan year to the extent funds remain after paying plan expenses.

Comment. With both the anticutback concern and because this would be a discretionary change, plan amendments will need to be adopted before the end of the plan year — don’t expect extra time under a remedial amendment rule.

In Closing

If not addressed in response to the proposed rule in 2017, plan sponsors may wish to consider their options now that the rule is in final form and revise documents and administrative procedures accordingly.

Related insights

DOL offers additional COVID-19 guidance under the FMLA

Updated COVID-19 guidance from the DOL’s Wage and Hour Division addresses qualifying for —...

Read more

DOL updates guidance on COVID-19 and the Fair Labor Standards Act

Updated guidance from the DOL’s Wage and Hour Division addresses ongoing wage and hour...

Read more

DOL issues new FMLA forms

On July 16, the DOL’s Wage and Hour Division issued new model forms for...

Read more