IRS Releases New Guidance on Forfeitures
On January 18, the IRS issued new proposed regulations to amend the definitions of qualified matching contributions (“QMAC”) and qualified non-elective contributions (“QNEC”). In addition, the IRS issued proposed regulations related to the funding of contributions under a safe harbor plan.
Why is this newsworthy? In accordance with the relevant Sections of 401(k) of the Internal Revenue Code (the “Code”), QMAC, QNEC, and safe harbor contributions are required to be fully vested on the date the contributions are made to the plan. In the past, the IRS took the position that forfeitures could not be used as contributions for QMAC, QNEC or safe harbors because forfeitures are not fully vested on the date the contributions are made to the plan. The IRS’ narrow interpretation of the relevant Code Sections applied even when the plan documents allowed the use of forfeitures for QMAC and QNEC contributions.
Instead of requiring that contributions be fully vested at the time the contribution is made to the Plan, the new IRS regulations require that QMAC and QNEC contributions be fully vested at the time the contributions are allocated to the participants’ accounts. The new regulation also permits the use of forfeitures to offset safe harbor contributions.
The proposed regulations will become effective after the final regulations are published; however, the IRS issuing these proposed regulations assures us that the regulations may be relied upon presently.
Before taking advantage of the benefits this regulation affords, Hall Benefits Law recommends that you take the time to review your plan documents to ascertain whether the plan permits or prohibits the use of forfeitures for the purposes discussed in this article. If the plan documents prohibit the use of forfeitures for QMAC, QNEC, or safe harbor contributions, you will need to contact the plan document sponsor to see whether it will amend the plan document to permit the use of forfeitures for these purposes. If an amendment is forthcoming, the plan document sponsor can tell you when the relevant amendment will take effect.
Finally, if you are a plan sponsor currently under audit and need to make a QMAC or QNEC contribution, now may be a good time to talk to the auditor and see if he or she will allow you to use forfeitures to make the relevant correction.
Hall Benefits Law can help you with any questions you have regarding this issue.