Final Regulations just released by the IRS, which are substantively the same as last year’s proposed regulations, amended the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) such that forfeitures may now be used to fund them. Prior to the release of the Final Regulations, the prior rules required QMACs and QNECs to be nonforfeitable at the time they were contributed to the plan not when they were actually allocated to participants’ accounts. Accordingly, forfeitures could not be used to fund QMACs and QNECs because they were subject to a vesting schedule (i.e., were forfeitable) at the time of contribution. The QMAC and QNEC definitions have now been amended to require nonforfeitability only at the time of allocation. So now forfeitures can fund QMACs and QNECs.
What all this means is that plan sponsors wishing to take advantage of the new rules should amend their plan to define QMACs and QNECs in a manner consistent with the definitions contained in the Final Regulations. The Final Regulations also provide a fair amount of flexibility in applying the new rules to plan years before their effective date of July 20, 2018, provided that the prohibitions of 411(d)(6) are observed. So for any plan sponsors that have sizeable forfeiture balances and known errors that can be cured by QMACs or QNECs, the Final Regulations provide the perfect incentive for bringing their plans into compliance.