IRS Proposes Changes to QMAC, QNEC Definitions

The Internal Revenue Service (IRS) is proposing amendments to 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 Section 401(k) of the Employee Retirement Income Security Act (ERISA) or that provide for matching contributions or employee contributions under Section 401(m).

Under the proposed 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.

The IRS explained that it has received comments with respect to the definitions of QMACs and QNECs in Sections 1.401(k)-6 and 1.401(m)-5 of ERISA. In particular, commenters assert that employer contributions should be able to qualify as QMACs and QNECs as long as they satisfy applicable nonforfeitability and distribution requirements at the time they are allocated to participants’ accounts, rather than when they are first contributed to the plan.

Commenters contend that interpreting sections 401(k)(3)(D)(ii) and 401(m)(4)(C) to require satisfaction of applicable nonforfeitability and distribution requirements at the time amounts are first contributed to the plan would preclude plan sponsors with plans that permit the use of amounts in plan forfeiture accounts to offset future employer contributions under the plan from applying such amounts to fund QMACs and QNECs. This is because the amounts would have been allocated to the forfeiture accounts only after a participant incurred a forfeiture of benefits and, thus, generally would have been subject to a vesting schedule when they were first contributed to the plan.

Commenters have requested that QMAC and QNEC requirements not be interpreted to prevent the use of plan forfeitures to fund QMACs and QNECs. 

After consideration of the comments the Treasury Department and the IRS are proposing to amend Section 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 Section 1.401(k)-1(c) and (d) when allocated to participants’ accounts, and to no longer require that amounts used to fund QMACs and QNECs satisfy the nonforfeitability and distribution requirements when they are first contributed to the plan. The agencies note 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 consistent with Section 401(k)(2)(C) and the title of Section 1.401(k)-1(c). 

Accordingly, these proposed regulations would amend these definitions to clarify those references by replacing the word “vesting” with “nonforfeitability” in each definition; these changes are not otherwise intended to have any substantive impact on this or any other section of the regulations. 

These proposed regulations would also amend the definitions of QMACs and QNECs in Section 1.401(m)-5 to provide cross-references to the definitions of QMACs and QNECs under Section 1.401(k)-6. The amendments to Section 1.401(m)-5 are being made to ensure a consistent definition of QMACs and QNECs in both sections.