[Federal Register Volume 82, Number 11 (Wednesday, January 18, 2017)]
[Proposed Rules]
[Pages 5477-5480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00876]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-131643-15]
RIN-1545-BN05


Definitions of Qualified Matching Contributions and Qualified 
Nonelective Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed 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) or that provide for matching contributions or employee 
contributions under section 401(m). Under these 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. These 
regulations would affect participants in, beneficiaries of, employers 
maintaining, and administrators of tax-qualified plans that contain 
cash or deferred arrangements or provide for matching contributions or 
employee contributions.

DATES: Comments and requests for a public hearing must be received by 
April 18, 2017.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-131643-15) Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
131643-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224, or sent electronically via the 
Federal eRulemaking Portal at

[[Page 5478]]

www.regulations.gov (IRS REG-131643-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Rosemary Y. Oluwo at (202) 317-6060; concerning submissions of comments 
or to request a hearing, Regina Johnson at (202) 317-6901 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 401(k)(1) provides that a profit-sharing or stock bonus 
plan, a pre-ERISA money purchase plan, or a rural cooperative plan 
shall not be considered as failing to satisfy the requirements of 
section 401(a) merely because the plan includes a qualified cash or 
deferred arrangement (CODA). To be considered a qualified CODA, a plan 
must satisfy several requirements, including: (i) Under section 
401(k)(2)(B), amounts held by the plan's trust that are attributable to 
employer contributions made pursuant to an employee's election must 
satisfy certain distribution requirements; (ii) under section 
401(k)(2)(C), an employees' right to such employer contributions must 
be nonforfeitable; and (iii) under section 401(k)(3), such employer 
contributions must satisfy certain nondiscrimination requirements.
    Under section 401(k)(3)(D)(ii), the employer contributions taken 
into account for purposes of applying the nondiscrimination 
requirements may, under such rules as the Secretary may provide and at 
the election of the employer, include, in addition to contributions 
made pursuant to an employee's election, matching contributions that 
meet the distribution and nonforfeitability requirements of section 
401(k)(2)(B) and (C) and qualified nonelective contributions within the 
meaning of section 401(m)(4)(C). Under section 401(m)(4)(C), a 
qualified nonelective contribution is an employer contribution, other 
than a matching contribution, with respect to which the distribution 
and nonforfeitability requirements of section 401(k)(2)(B) and (C) are 
met.
    Under Sec.  1.401(k)-1(b)(1)(ii), a CODA satisfies the applicable 
nondiscrimination requirements if it satisfies the actual deferral 
percentage (ADP) test of section 401(k)(3), described in Sec.  
1.401(k)-2. The ADP test limits the degree of disparity permitted 
between the percentage of compensation made as employer contributions 
to the plan for a plan year on behalf of eligible highly compensated 
employees and the percentage of compensation made as employer 
contributions on behalf of eligible nonhighly compensated employees. If 
the ADP test limits are exceeded, the employer must take corrective 
action to ensure that the limits are met. In determining the amount of 
employer contributions made on behalf of an eligible employee, 
employers are allowed to take into account certain qualified matching 
contributions (QMACs) and qualified nonelective contributions (QNECs) 
made on behalf of the employee by the employer.
    In lieu of applying the ADP test, an employer may choose to design 
its plan to satisfy an ADP safe harbor, including the ADP safe harbor 
provisions of section 401(k)(12), described in Sec.  1.401(k)-3. Under 
Sec.  1.401(k)-3, a plan satisfies the ADP safe harbor provisions of 
section 401(k)(12) if, among other things, it satisfies certain 
contribution requirements. With respect to the safe harbor under 
section 401(k)(12), an employer may choose to satisfy the contribution 
requirement by providing a certain level of QMACs or QNECs to eligible 
nonhighly compensated employees under the plan.
    A defined contribution plan that provides for matching or employee 
after-tax contributions must satisfy the nondiscrimination requirements 
under section 401(m) with respect to those contributions for any plan 
year. Under Sec.  1.401(m)-1(b)(1), the matching contributions and 
employee contributions under a plan satisfy the nondiscrimination 
requirements for a plan year if the plan satisfies the actual 
contribution percentage (ACP) test of section 401(m)(2) described in 
Sec.  1.401(m)-2.
    The ACP test limits the degree of disparity permitted between the 
percentage of compensation made as matching contributions and after-tax 
employee contributions for or by eligible highly compensated employees 
under the plan and the percentage of compensation made as matching 
contributions and after-tax employee contributions for or by eligible 
nonhighly compensated employees under the plan. If the ACP test limits 
are exceeded, the employer must take corrective action to ensure that 
the limits are met. In determining the amount of employer contributions 
made on behalf of an eligible employee, employers are allowed to take 
into account certain QNECs made on behalf of the employee by the 
employer. Employers must also take into account QMACs made on behalf of 
the employee by the employer unless an exclusion applies (including an 
exclusion for QMACs that are taken into account under the ADP test).
    If an employer designs its plan to satisfy the ADP safe harbor of 
section 401(k)(12), it may avoid performing the ACP test with respect 
to matching contributions under the plan, as long as the additional 
requirements of the ACP safe harbor of section 401(m)(11) are met.
    Under Sec.  1.401(k)-6, QMACs and QNECs are matching contributions 
and employer contributions (other than elective or matching 
contributions) that satisfy the nonforfeitability requirements of Sec.  
1.401(k)-1(c) and the distribution requirements of Sec.  1.401(k)-1(d) 
``when they are contributed to the plan.'' Similarly, Sec.  1.401(m)-5 
includes independent definitions of QMACs and QNECs, which are matching 
contributions and employer contributions (other than elective or 
matching contributions) that satisfy the nonforfeitability and 
distribution requirements of Sec.  1.401(k)-1(c) and (d) ``at the time 
the contribution is made.''
    The Treasury Department and the IRS have received comments with 
respect to the definitions of QMACs and QNECs in Sec. Sec.  1.401(k)-6 
and 1.401(m)-5. 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. The commenters urge that the 
nonforfeitability and distribution requirements under Sec.  1.401(k)-6 
should apply when QMACs and QNECs are allocated to participants' 
accounts and not when the contributions are first made to the plan.

[[Page 5479]]

Explanation of Provisions

    After consideration of the comments described in this preamble in 
the ``Background'' section, the Treasury Department and the IRS are 
proposing to amend Sec.  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 Sec.  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. 
Treasury and IRS note that while the second sentence of each of the 
current definitions of QMACs and QNECs refers to the ``vesting'' 
requirements of Sec.  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 Sec.  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 
Sec.  1.401(m)-5 to provide cross-references to the definitions of 
QMACs and QNECs under Sec.  1.401(k)-6. These amendments to Sec.  
1.401(m)-5 are being made to ensure a consistent definition of QMACs 
and QNECs in Sec.  1.401(k)-6 and Sec.  1.401(m)-5 (including the 
requirement that amounts used to fund QMACs and QNECs be made subject 
to nonforfeitability and distribution requirements when they are 
allocated to participants' accounts as QMACs or QNECs) and are not 
otherwise intended to have any substantive impact on this or any other 
section of the regulations.

Proposed Effective/Applicability Date

    These regulations are proposed to apply to taxable years beginning 
on or after the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register. Taxpayers, 
however, may rely on these proposed regulations for periods preceding 
the proposed applicability date. If, and to the extent, the final 
regulations are more restrictive than the rules in these proposed 
regulations, those provisions of the final regulations will be applied 
without retroactive effect.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. Because the regulation does not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, these regulations will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on their 
impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the Addresses heading. 
Treasury and the IRS request comments on all aspects of the proposed 
rules. All comments will be available at www.regulations.gov or upon 
request. A public hearing will be scheduled if requested in writing by 
any person who timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal author of these regulations is Rosemary Y. Oluwo, 
Office of Associate Chief Counsel (Tax Exempt and Governmental 
Entities). However, other personnel from the IRS and Treasury 
Department participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.401(k)-1 is amended by adding paragraph (g)(5) to 
read as follows:


Sec.  1.401(k)-1  Certain cash or deferred arrangements.

* * * * *
    (g) * * *
    (5) Effective date for definitions of qualified matching 
contributions (QMACs) and qualified nonelective contributions (QNECs). 
The revisions to the second sentence in the definitions of QMACs and 
QNECs in Sec.  1.401(k)-6 apply to taxable years ending on or after the 
date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register.

0
Par. 3. Section 1.401(k)-6 is amended by revising the second sentence 
in the definitions of Qualified matching contributions (QMACs) and 
Qualified nonelective contributions (QNECs) to read as follows:


Sec.  1.401(k)-6  Definitions.

* * * * *
    Qualified matching contributions (QMACs). * * * Thus, the matching 
contributions must satisfy the nonforfeitability requirements of Sec.  
1.401(k)-1(c) and be subject to the distribution requirements of Sec.  
1.401(k)-1(d) when they are allocated to participants' accounts. * * *
    Qualified nonelective contributions (QNECs). * * * Thus, the 
nonelective contributions must satisfy the nonforfeitability 
requirements of Sec.  1.401(k)-1(c) and be subject to the distribution 
requirements of Sec.  1.401(k)-1(d) when they are allocated to 
participants' accounts. * * *
* * * * *
0
Par. 4. Section 1.401(m)-1 is amended by adding paragraph (d)(4) to 
read as follows:


Sec.  1.401(m)-1  Employee contributions and matching contributions.

* * * * *
    (d) * * *
    (4) Effective date for definitions of qualified matching 
contributions (QMACs) and qualified nonelective contributions (QNECs). 
The revisions to the definitions of QMACs and QNECs in Sec.  1.401(m)-5 
apply to taxable years ending on or after the date of publication of 
the Treasury decision adopting these rules as final regulations in the 
Federal Register.

0
Par. 5. Section 1.401(m)-5 is amended by revising the definitions of 
Qualified matching contributions (QMACs) and Qualified nonelective 
contributions (QNECs) to read as follows:


Sec.  1.401(m)-5  Definitions.

* * * * *
    Qualified matching contributions (QMACs). Qualified matching 
contributions or QMACs means qualified matching contributions or QMACs 
as defined in Sec.  1.401(k)-6.

[[Page 5480]]

    Qualified nonelective contributions (QNECs). Qualified nonelective 
contributions or QNECs means qualified nonelective contributions or 
QNECs as defined in Sec.  1.401(k)-6.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2017-00876 Filed 1-17-17; 8:45 am]
 BILLING CODE 4830-01-P