On July 20, 2018, the Internal Revenue Service (IRS) and U.S. Treasury Department finalized the proposed regulation pertaining to using plan forfeitures to fund qualified nonelective contributions (QNEC) and qualified matching contributions (QMAC). The final regulation, which adopts the proposed regulation that was issued on January 18, 2017 without substantive modification, amends the definitions of QNEC and QMAC for defined contribution employer-sponsored retirement plans to allow participant forfeitures to be used to fund QNECs and QMACs.
Under the final regulations, employer contributions would qualify as QMACs or QNECs simply if they satisfy applicable nonforfeitability and distribution requirements when they are allocated to participants’ accounts, not just at initial plan contribution stage.
QNECs and QMACs are types of employer contributions to qualified retirement plans commonly used to correct certain contribution testing failures in defined contribution (DC) plans. Unless certain safe harbor exemptions apply, DC plans generally must satisfy rules limiting gaps between the average deferrals of highly compensated employees (HCEs) and non-highly compensated employees (NHCEs).
If the plan fails tests (nondiscrimination testing) evaluating the gaps between HCEs and NHCEs, a correction must be made by returning excess deposits to the HCEs or making either a QNEC or a QMAC (or sometimes both) to certain 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%. QMACs are immediately vested matching contributions made by the plan sponsor, determined by a percentage of the employee’s elective deferral, subject to certain limits.
On April 21, 2017 the Merrill Lynch prototype plan document was amended on behalf of all Primary Employers as permitted by the proposed regulation to reflect the changes first introduced by the proposed regulation. Plan sponsors with custom plans who did not amend their plans based on the proposed regulations may revise plan documents by the end of this year to allow the use of plan forfeitures for employer QNEC and QMAC contributions.
Please reach out to your Bank of America Merrill Lynch representative with any questions.