In Depth
The Internal Revenue Service recently released final regulations confirming that employers can use plan forfeitures to fund qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) and safe harbor contributions.
As explained in our earlier On the Subject discussing this topic, IRS regulations historically provided that QNECs, QMACs and certain safe harbor contributions had to be 100 percent vested at the time the amounts were contributed to an employer’s plan. The IRS interpreted this requirement to prohibit employers from using forfeitures to fund QNECs, QMACs and certain safe harbor contributions. In particular, according to the IRS, using forfeitures for this purpose was impermissible because contributions allocated to a plan’s forfeiture account were subject to a vesting schedule when the contributions were first made to the plan (as employer matching or profit sharing contributions). Therefore, the IRS took the position that forfeitures could never be used to fund QNECs, QMACs or certain safe harbor contributions even if the forfeitures were fully vested at the time they were ultimately re-allocated to participant accounts as QNECs, QMACs or safe harbor contributions.
In response to numerous comments regarding this requirement, the IRS issued proposed regulations in January, 2017 clarifying that QNECs, QMACs and safe harbor contributions were only required to be fully vested at the time the contributions were allocated to participant accounts, rather than when first contributed to the plan. As a result, employers could use forfeitures to fund QNECs, QMACs and safe harbor contributions.
The final regulations issued late last month confirm the approach outlined in the proposed regulations. Importantly, employers were actually permitted to rely on those proposed immediately. As a result, the final regulations simply confirm that plan sponsors can continue to use forfeitures to fund QNECs, QMACs and safe harbor contributions. Before doing so, however, plan sponsors should review their plan documents carefully to ensure that the plans allow forfeitures to be used for such purposes.
