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Plan Amendment Alert: New Opportunity To Use Forfeitures

Last month, the Internal Revenue Service (“IRS”) issued new proposed regulations affecting forfeitures when funding qualified non-elective contributions (“QNECs”), qualified matching contributions (“QMACs”) and safe harbor contributions (“SHCs”). As described below, this presents an opportunity for plan sponsors to amend their plans to take advantage of the new rules, effective immediately.


Beginning in 2011, the IRS interpreted statutory language in the 401(k) regulations to prohibit plan sponsors from using forfeitures in making QNECs, QMACs and, by extension, SHCs. The interpretation—which many in the qualified retirement plan community disagreed with—was based upon the requirement that these special employer contributions be fully vested at the time they are contributed to a plan, not just when they are allocated to participants’ accounts. By definition, forfeitures are non-vested employer contributions (that arise when participants separate from service) and that was the rationale for the IRS’ position.

Given this relatively recent interpretation by the IRS, the prohibition was not contained in many prior plan documents (e.g. EGTRRA-compliant documents). However, the IRS has generally required that newer plan documents, including those recently adopted or restated to comply with the Pension Protection Act, include language that precludes the use of forfeitures in funding such employer contributions.

New Proposed Regulations

On January 18, 2017, the IRS reversed course by issuing proposed regulations, which only require that QNECs, QMACs and SHCs be fully vested when they are allocated to participants’ accounts. This welcome change will now allow forfeitures to be utilized in making these employer contributions. Therefore, going forward plan sponsors will have greater flexibility in correcting negative nondiscrimination testing results, making corrective contributions under the IRS’ Employee Plans Compliance Resolution System (“EPCRS”) and in satisfying the safe harbor contribution requirement—the most common uses for QNECs, QMACs and SHCs, respectively.

Although the proposed regulations will become effective after the date that final regulations are published, the IRS has indicated that they may be relied upon immediately. Prior to utilizing forfeitures to fund these special employer contributions, plan sponsors need to check their plan documents because as noted above, the IRS has generally required language in more recent plan documents that prohibits such use. Accordingly, plan documents will likely need to be amended to remove any language that restricts such use of forfeitures.

To take advantage of these new proposed regulations, most plans will need to be amended. Please feel free to contact our Firm if you would like to discuss any of the foregoing information in greater detail.

© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of February 28, 2017.

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