The Internal Revenue Service (IRS) and U.S. Treasury Department on July 20 issued final regulations amending the definitions of qualified nonelective contribution (QNEC) and qualified matching contribution (QMAC) for employer-sponsored retirement plans to resolve questions about whether participant forfeitures can be used to fund QNECs and QMACs.
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The regulations took effect July 20, their day of publication in the Federal Register. The IRS also indicated in the regulations’ proposed form in early 2017 that the change can be relied upon for earlier periods.
The finalized regulations allow QNECs and QMACs to apply at account allocation, not only at the initial plan contribution stage. Under the new regulations, such employer contributions would qualify as QMACs or QNECs simply if they satisfy applicable nonforfeitability and distribution requirements when they are allocated to participants’ accounts, the IRS said.
Questions on Funding
Public commenters in the past had told the agency that applying nonforfeitability and distribution requirements only at the first point of plan contribution to fund QNECs and QMACs would prevent plans from applying forfeited amounts from the accounts of participants not fully vested to offset future employer contributions. This is because the money would have been allocated to the forfeiture accounts only after a participant incurred a forfeiture of benefits. The participants usually would have been subject to a vesting schedule when they first contributed to the plan.
QNECs and QMACs are types of employer contributions to qualified retirement plans commonly used to correct certain contribution testing failures in defined contribution (DC) 401(k) plans. Unless certain safe harbor exemptions apply, 401(k) plans generally must satisfy rules limiting gaps between the average deferrals of highly compensated employees (HCEs) and non-highly compensated employees (non-HCEs).
If the plan is deemed to have failed any of these tests, a correction must be made by returning excess deposits to the HCEs or making either a QNEC or a QMAC (or sometimes both) to all eligible NHCEs, in order to increase their average percentage deferrals or match in comparison with the HCEs.
QNECs are immediately vested contributions made by the plan sponsor to a participant’s account. They are calculated based on a percentage of the participant’s compensation, limited to 5 percent. QMACs are immediately vested matching contributions made by the plan sponsor, figured based on a percentage of the employee’s elective deferral, subject to certain limits.
First Proposed in January 2017
The final regulations codify proposed regulations issued by the IRS in January 2017 (see February 2017 story), which first altered the definitions of QNEC and QMAC to allow the use of forfeitures in funding QNEC and QMAC contributions. Before 2017, the IRS and Treasury Department interpreted regulations in a manner that did not permit the use of participant forfeitures to fund these employer contributions.
If they did not already address this issue in response to the proposed rule in 2017, plan sponsors may wish to do so now based on the final regulations and revise their plan documents and administrative procedures by the end of this year to allow the use of forfeitures for employer QNEC and QMAC contributions.
Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.