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Proposed Reg Would Free Up Forfeitures to Fund Safe Harbor Contributions

A proposed regulation from the IRS looks to be (very) good news for plan sponsors, allowing plan forfeitures to be used to fund safe harbor contributions.

It’s an issue that has long been on the radar screen of sister association ASPPA’s Government Affairs Committee (GAC), which has been actively seeking this revision since the IRS interpretation came to light in 2011. Indeed, the proposed regulation looks to closely mirror the GAC’s recommendations. Said American Retirement Association General Counsel Craig P. Hoffman, “We are very appreciative of the work done by IRS and Treasury Department on this proposal. It is obvious they gave due consideration to our comment letters and we believe the regulation, as amended, will more closely adhere to the statutory language and the intent of Congress. Although a very technical issue, our members and the plan sponsors they work with will be very happy with this result.”

Now, what the proposed regulation would do is relatively straightforward. How it does so? Not so much.

To summarize briefly, the proposed regulation would amend the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) in 401(k)s and plans that provide for matching contributions or employee contributions under Code Section 401(m). Specifically, it changes that definition by stating that employer contributions would qualify as QMACs or QNECs if they satisfy applicable nonforfeitability and distribution requirements at the time they are allocated to participants’ accounts, even though they didn’t meet those requirements when originally contributed to the plan.

The regulation would apply as of taxable years beginning on or after the date the regulations are published in final form, although taxpayers may rely on the proposed regulation before that date. If the final regulation is more restrictive than the proposed regulation, those provisions of the final regulation will not be applied retroactively.

The IRS will accept comments and requests for a public hearing on the proposed regulation through April 18.

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