IRS Proposed Reg Would Allow Forfeitures to Satisfy Safe Harbor Contribution Requirements
The IRS on Jan. 18 issued a proposed regulation that would allow forfeitures to be used to satisfy safe harbor contribution requirements.
The ASPPA Government Affairs Committee has been actively seeking this revision since the IRS interpretation came to light in 2011 in conjunction with the promulgation of model language for pre-approved plan documents. The action marks the successful culmination of ASPPA’s advocacy efforts in this regard. ASPPA’s General Counsel and Director of Regulatory Affairs, Craig P. Hoffman, said, “We are very appreciative of the work done by IRS and Treasury Department on this proposal. It is obvious they gave due consideration to our comment letters and we believe the regulation, as amended, will more closely adhere to the statutory language and the intent of Congress. Although a very technical issue, our members and the plan sponsors they work with will be very happy with this result.”
What the Proposed Regulation Does
The proposed regulation would 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 Internal Revenue Code Section 401(k) or that provide for matching contributions or employee contributions under section 401(m).
Under these regulations, employer contributions to a plan would be able to qualify as
QMACs or QNECs if they 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.
These regulations would affect participants in, beneficiaries of, employers maintaining, and administrators of tax-qualified plans that contain cash or deferred arrangements or provide for matching contributions or employee contributions.
Amendments to Treasury Regulations
The proposed regulation would amend Treas. Reg. §1.401(k)-6 to provide that amounts used to fund QMACs and QNECs must be nonforfeitable and subject to distribution restrictions in accordance with Treas. Reg. §1.401(k)-1(c) and (d) when allocated to participants’ accounts. It also provides that amounts used to fund QMACs and QNECs no longer would be required to satisfy the nonforfeitability and distribution requirements when they are first contributed to the plan.
Treasury and the IRS note that while the second sentence of each of the current definitions of QMACs and QNECs refers to the vesting requirements of Treas. Reg. §1.401(k)-1(c), those requirements are more appropriately characterized as “nonforfeitability” requirements consistent with Code Section 401(k)(2)(C) and the title of Treas. Reg. §1.401(k)-1(c). The proposed regulations would amend each of those definitions to clarify those references by replacing the word “vesting” with “nonforfeitability.”
The proposed regulation also would amend the definitions of QMACs and QNECs in Treas. Reg. §1.401(m)-5 to provide cross-references to their definitions under Treas. Reg. §1.401(k)-6. This is intended to ensure a consistent definition of QMACs and QNECs in both sections of the Treasury regulations, 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.
Proposed Effective/Applicability Date
The proposed reg is set to appear in the Federal Register of Jan. 18, 2017.
These regulations are proposed to apply to taxable years beginning on or after the date that the regulations are published in final form in the Federal Register.
Nonetheless, taxpayers may rely on the proposed regulation before that date. If the final regulation is more restrictive than the proposed regulation, those provisions of the final regulation will not be applied retroactively.
The IRS will accept comments on the proposed regulations and requests for a public hearing on them through April 18.
Comments and requests for a public hearing can be sent in print to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday 8:00 a.m.- 4 p.m. to:
Internal Revenue Service
1111 Constitution Avenue N.W.
Washington, DC 20224
Submissions can be sent electronically via the Federal eRulemaking Portal
at http://www.regulations.gov; identify with the designation IRS REG-131643-15.