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This blog entry may be a bit more technical than most of what we provide, but it represents a short and sweet attempt to describe an important development for plan sponsors that face nondiscrimination failures.
If your plan fails nondiscrimination requirements, many employers accomplish a correction by returning excess contributions to highly compensated employees (HCEs). Others, who prefer to keep those contributions in the plan, correct the failure by making an additional contribution for non-HCEs, which may be a Qualified Nonelective Contribution or a Qualified Matching Contribution. You may see those called “QNECs” or “QMACs”.
If you’re in the latter group, you may prefer to use any available forfeitures to fund all or or a portion of the QNEC or QMAC. Prior IRS regulations may have prevented you from doing so, though, because they required any corrective amounts to be fully vested at the time “contributed” to the plan. Because forfeitures were not fully vested when “contributed”, you couldn’t use them for the corrective contribution.
Last week, however, the IRS published a proposed regulation that merely requires the corrective contribution to be fully vested at the time it is “allocated” to a participant’s account. This frees up your ability to use forfeitures in this manner, which may save your company money and may influence you to pursue a corrective method that keeps money in the plan (rather than refunding it). Although the regulation is merely in proposed form, the IRS was careful to clarify that that you may rely on the regulation for periods preceding the regulation becoming final. In essence, this means you can rely on it for prior years and while the regulation remains proposed.
At a meeting with IRS and Treasury officials last week, the IRS confirmed its hope that this regulation will facilitate the reasonable practice of keeping money in plans. We suspect that will become more likely if the IRS were to relax its stance on the deadline for using forfeitures, but that may take some time.
Matthew Eickman
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