The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9835) to amend the definitions of “qualified matching contributions” (QMACs) and “qualified nonelective contributions” (QNECs) under regulations relating to certain qualified retirement plans that contain cash or deferred arrangements under section 401(k) or that provide for matching contributions or employee contributions under section 401(m).
Employer contributions to a plan, thus, qualify as QMACs or QNECs if the contributions satisfy applicable nonforfeitability and distribution requirements at the time they are allocated to participants’ accounts, but need not meet these requirements when they are contributed to the plan.
With today’s final regulations [PDF 201 KB], regulations proposed in January 2017 were “adopted without substantive modification.”
As explained when the regulations were proposed in January 2017—read TaxNewsFlash—the IRS and Treasury had received comments that employer contributions ought to qualify as QMACs and QNECs if they satisfy applicable nonforfeitability and distribution requirements at the time they are allocated to participants’ accounts, rather than when they are first contributed to the plan. If nonforfeitability and distribution requirements were required to be satisfied at the time when amounts are first contributed to the plan, this treatment would preclude plan sponsors with plans that permit the use of amounts in plan-forfeiture accounts to offset future employer contributions under the plan from applying such amounts to fund QMACs and QNECs. The amounts would have been allocated to the forfeiture accounts only after a participant incurred a forfeiture of benefits and, thus, generally would have been subject to a vesting schedule when they were first contributed to the plan.
Commenters requested that QMAC and QNEC requirements not be interpreted to prevent the use of plan forfeitures to fund QMACs and QNECs, and urged that the nonforfeitability and distribution requirements are to apply when QMACs and QNECs are allocated to participants’ accounts and not when the contributions are first made to the plan.
In response, regulations were proposed to amend Reg. section 1.401(k)-6 to provide that amounts used to fund QMACs and QNECs must be nonforfeitable and subject to distribution restrictions when allocated to participants’ accounts. The rules would no longer require that amounts used to fund QMACs and QNECs satisfy the nonforfeitability and distribution requirements when they are first contributed to the plan. Other changes concerned the “vesting” requirements of Reg. section 1.401(k)-1(c) by replacing the word “vesting” with “nonforfeitability” and to provide for a consistent definition of QMACs and QNECs (including the requirement that amounts used to fund QMACs and QNECs be made subject to nonforfeitability and distribution requirements when they are allocated to participants’ accounts as QMACs or QNECs) throughout the regulations.
As noted in the preamble to today’s final regulations, no public hearing on the proposed regulations was requested or held, but several comments on the proposed regulations were submitted. The IRS and Treasury, after considering all of the comments, adopted the changes in the proposed regulations without substantive modification.
This change to the definition of QNEC makes it easier for employers to correct 401(k) actual deferral percentage (ADP) and actual contribution percentage (ACP) failures. Forfeiture amounts may be used to make additional employer contributions to correct these nondiscrimination failures. These additional contributions benefit rank-and-file employees.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Robert Delgado | +1 (858) 750-7133 | firstname.lastname@example.org
Terri Stecher | +1 (202) 533-4830 | email@example.com
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.