By Jane Meacham, contributing editor

The Internal Revenue Service (IRS) has proposed to shift the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) to employer-sponsored retirement plans to apply at account allocation, not at the initial plan contribution stage.

The agency is proposing the change in response to practitioners’ requests that QMAC and QNEC requirements not be defined to prevent the use of plan forfeitures to fund these outlays. 

The proposed new rule, published January 18 as 82 FR 5477 in the Federal Register, is being made under regulations for qualified 401(k) plans that contain cash or deferred arrangements or provide for matching contributions or employee contributions.

Under the regulations, employer contributions to a plan would be able to qualify as QMACs or QNECs if they satisfy applicable nonforfeitability and distribution requirements when they are allocated to participants’ accounts, but need not do so when they are first contributed to the plan by a plan sponsor, the IRS said.

What are QMACs and QNECs?

QMACs and QNECs are corrections that 401(k) plans can use when the plan fails the required actual deferral percentage (ADP) or actual contribution percentage (ACP) testing designed to ensure nondiscrimination in contributions to highly compensated employees (HCEs).

If the plan is deemed to have failed either of these tests, a correction must be made by returning excess deposits to the HCEs or making either a QNEC or a QMAC (or sometimes both) to all eligible 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 percent.

QMACs are immediately vested matching contributions made by the plan sponsor, figured based on a percentage of the employee’s elective deferral, subject to certain limits.

The rule change is proposed to apply to taxable years beginning on or after the date of publication of the rules as final regulations. But the agency said taxpayers may rely on these proposed regulations before the proposed applicability date. If the final regulations are more restrictive than the rules in these proposed regulations, the final regulations will be applied without retroactive effect, the IRS said.

Commenters’ Requested Interpretation

Commenters have asked the IRS that QMAC and QNEC requirements not be interpreted to prevent the use of plan forfeitures to fund QMAC and QNEC payments. 

They have asserted that employer contributions should be able to qualify as QMACs and QNECs as long as they satisfy applicable requirements when they are allocated to participants’ accounts, not when they are first contributed to the plan, the IRS said in the proposed rule change.

The commenters have told the agency that applying nonforfeitability and distribution requirements at the first point of plan contribution would prevent plans that allow the use of amounts in plan forfeiture accounts to offset future employer contributions from applying such amounts to fund QMACs and QNECs. This is because the money would have been allocated to the forfeiture accounts only after a participant incurred a forfeiture of benefits. The participants usually would have been subject to a vesting schedule when they first contributed to the plan.

In response, the IRS said in the proposed rule change that “while the second sentence of each of the current definitions of QMACs and QNECs refers to the ‘vesting’ requirements of Section?1.401(k)-1(c), those requirements are more appropriately characterized as ‘nonforfeitability’ requirements…”

As such, the proposed regulations would amend the definitions to clarify those references by replacing the word “vesting” with “nonforfeitability” in each. The agency said the changes are not intended to have a substantive impact on the regulations.

Comments and requests about the proposed rule change must be received by April 18.