Plans Can Use Forfeitures to Fund Future Qualified Matching or Nonelective Contributions

New IRS regulations let employers use plan forfeitures to fund qualified matching contributions (QMACs) or qualified nonelective contributions (QNECs) to retirement plans under the 401(k) safe harbor rules.

QMAC and QNEC Timing Requirements

Employers can qualify for a 401(k) nondiscrimination safe harbor by making qualified matching contributions or qualified nonelective contributions to their retirement plans. These contributions must satisfy strict distribution and forfeitures requirements.

Under the existing rules, the requirements apply when the employer makes the contribution. Thus, forfeited contributions that were made on behalf of a different employee cannot satisfy the requirements.

This is because the amounts are allocated to the forfeiture accounts only after a participant forfeits benefits. Thus, they generally are subject to a vesting schedule when they were first contributed to the plan. This means that even when a plan lets forfeiture accounts offset future employer contributions, the plan cannot use those amounts to fund QMACs and QNECs

Change in Timing

Under the new rule, distribution and forfeitability requirements apply when the employer allocates  the contribution to participants’ accounts. Thus, QMACs and QNECs do not have to satisfy the  requirements when they are first contributed to the plan.

This new rule applies to plan years beginning on or after July 20, 2018, but plans may use the new rule for earlier periods.

Using Plan Forfeitures

Plan forfeitures consist of employer contributions on behalf of former employees who left employment before fully satisfying vesting or length of service requirements. Plans typically use these amounts to fund plan expenses or future contributions. They are deductible when contributed, so an employer cannot deduct a future allocation in a future year.

T.D. 9835

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CCHTaxGroup

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