On January 18, 2017, the IRS issued a proposed regulation allowing forfeitures in a defined contribution plan to be used to satisfy certain contributions made to plans containing cash or deferred arrangements under Code Section 401(k). This issue has been the subject of years of debate and interpretation by the industry which has been actively petitioning the IRS for a change.
This proposed regulation seeks to amend the definition of qualified matching contributions (QMACs) and qualified non-elective contributions (QNECs) under the Code Section 401(k) cash or deferred regulations for those plans providing matching contributions or employee contributions under Code Section 401(m), by allowing forfeitures designed to reduce future employer contributions to be used toward QNECs or QMACs in a failed ADP/ACP test or as a safe harbor contribution.
Although only proposed, 401(k) plans may start utilizing the new definitions so that forfeited employer contributions would qualify as a QMAC or a QNEC if they satisfy the nonforfeitability and distribution requirements features of those contributions at the time they are allocated to participants instead of when they were contributed to the plan.
The proposed regulations will be effective for taxable years beginning on or after publication in final form, however, plans may utilize the changes for plan years beginning in 2017. If the final regulations are found to be more restrictive, such amendment will be applied after the date the regulations are finalized.
Amendments Needed to Plan Documents
To accommodate the change in definitions, a good-faith amendment will be made on the mass submitter level and added as an addendum to the Volume Submitter and Prototype Defined Contribution basic plan documents so that only a copy needs to be provided to your adopting employers. No formal amendment is required on the employer level unless a plan has not been designed to reduce employer contributions with forfeited amounts.
For those who use the ESOP and KSOP individually-designed plans, an amendment will also be made to the definitions of QMACs and QNECs to reflect the proposed regulations.