[Federal Register Volume 83, Number 140 (Friday, July 20, 2018)]
[Rules and Regulations]
[Pages 34469-34471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15495]



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 Rules and Regulations
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  Federal Register / Vol. 83, No. 140 / Friday, July 20, 2018 / Rules 
and Regulations  

[[Page 34469]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9835]
RIN-1545-BN05


Definitions of Qualified Matching Contributions and Qualified 
Nonelective Contributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that amend the 
definitions of qualified matching contributions (QMACs) and qualified 
nonelective contributions (QNECs) under regulations regarding 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, 
an employer contribution to a plan may be a QMAC or QNEC if it 
satisfies applicable nonforfeitability requirements and distribution 
limitations at the time it is allocated to a participant's account, but 
need not meet these requirements or limitations when it is contributed 
to the plan. These regulations 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: Effective date. These regulations are effective July 20, 2018.
    Applicability date. These regulations apply to plan years beginning 
on or after July 20, 2018. However, taxpayers may apply these 
regulations to earlier periods.

FOR FURTHER INFORMATION CONTACT: Angelique Carrington at (202) 317-4148 
(not a toll-free number).

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 will 
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 limitations; (ii) under section 
401(k)(2)(C), an employee's 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 matching contributions within the 
meaning of section 401(m)(4)(A) that meet the distribution limitations 
and nonforfeitability requirements of section 401(k)(2)(B) and (C) 
(also referred to as qualified matching contributions or QMACs) and 
qualified nonelective contributions within the meaning of section 
401(m)(4)(C) (QNECs). Under section 401(m)(4)(C), a QNEC is an employer 
contribution, other than a matching contribution, with respect to which 
the distribution limitations 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 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 QMACs and 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 each 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 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

[[Page 34470]]

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.
    As defined in Sec.  1.401(k)-6, QMACs and QNECs must satisfy the 
nonforfeitability requirements of Sec.  1.401(k)-1(c) and the 
distribution limitations \1\ of Sec.  1.401(k)-1(d) ``when they are 
contributed to the plan.'' Similarly, under the independent definitions 
in Sec.  1.401(m)-5, QMACs and QNECs must satisfy the nonforfeitability 
requirements of Sec.  1.401(k)-1(c) and the distribution limitations of 
Sec.  1.401(k)-1(d) ``at the time the contribution is made.'' In 
general, contributions satisfy the nonforfeitability requirements of 
Sec.  1.401(k)-1(c) if they are immediately nonforfeitable within the 
meaning of section 411, and contributions satisfy the distribution 
limitations of Sec.  1.401(k)-1(d) if they may not be distributed 
before the employee's death, disability, severance from employment, 
attainment of age 59\1/2\, or hardship, or upon the termination of the 
plan.
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    \1\ The existing definitions of QMACs and QNECs in Sec. Sec.  
1.401(k)-6 and 1.401(m)-5 refer to the distribution requirements of 
Sec.  1.401(k)-1(d). Section 1.401(k)-1(d) is more appropriately 
characterized as providing distribution limitations (consistent with 
the heading of Sec.  1.401(k)-1d)). Accordingly, this preamble 
refers to distribution limitations rather than distribution 
requirements, and, as noted in the Explanation of Provisions section 
of this preamble, the definitions of QMACs and QNECs in Sec. Sec.  
1.401(k)-6 and 1.401(m)-5 are amended in the final regulations to 
refer to distribution limitations.
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    Before 2017, the Department of the Treasury (Treasury Department) 
and the Internal Revenue Service (IRS) 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 asserted that employer 
contributions should qualify as QMACs and QNECs as long as they satisfy 
applicable nonforfeitability requirements at the time they are 
allocated to participants' accounts, rather than when they are first 
contributed to the plan. Commenters pointed out that interpreting 
sections 401(k)(3)(D)(ii) and 401(m)(4)(C) to require satisfaction of 
applicable nonforfeitability 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 requested that QMAC and QNEC requirements not be interpreted 
to prevent the use of plan forfeitures to fund QMACs and QNECs. The 
commenters urged that the nonforfeitability 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.
    In considering the comments, the Treasury Department and the IRS 
took into account that the nonforfeitability requirements applicable to 
QMACs and QNECs are intended to ensure that QMACs and QNECS provide 
nonforfeitable benefits for the participants who receive them. In 
accordance with that purpose, the Treasury Department and the IRS 
concluded that it is sufficient to require that amounts allocated to 
participants' accounts as QMACs and QNECs be nonforfeitable at the time 
they are allocated to participants' accounts, rather than when such 
contributions are made to the plan.
    Accordingly, on January 18, 2017, the Treasury Department and the 
IRS issued a notice of proposed rulemaking (REG-131643-15), which was 
published in the Federal Register (82 FR 5477). Under the notice of 
proposed rulemaking, the Treasury Department and the IRS proposed to 
amend Sec.  1.401(k)-6 to provide that amounts used to fund QMACs and 
QNECs must be nonforfeitable and subject to distribution limitations 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 requirements and 
distribution limitations when they are first contributed to the plan. 
As a result, forfeitures would be permitted to be used to fund QMACs 
and QNECs. No public hearing on the notice of proposed rulemaking was 
requested or held. Several comments on the proposed rules were 
submitted, and, after consideration of all the comments, the proposed 
regulations are adopted without substantive modification.
    This document contains amendments to 26 CFR part 1.

Explanation of Provisions

    This document contains final regulations that amend the definitions 
of QMACs and QNECs to provide that employer contributions to a plan are 
QMACs or QNECs if they satisfy applicable nonforfeitability 
requirements and distribution limitations at the time they are 
allocated to participants' accounts. Accordingly, these regulations 
permit forfeitures of prior contributions to be used to fund QMACs and 
QNECs.
    The Treasury Department and the IRS received five comments in 
response to the notice of proposed rulemaking that raised issues 
relating to the modification of the QMAC and QNEC definitions, 
including issues with respect to plan amendments and the pre-approved 
plan program, as described in Rev. Proc. 2015-36, 2015-27 I.R.B. 20, 
Part III of Rev. Proc. 2016-37, 2016-29 I.R.B. 136, and Rev. Proc. 
2017-41, 2017-29 I.R.B. 92. The Treasury Department and the IRS 
determined that the comments relating to the pre-approved plan program 
are outside the scope of these regulations, which relate solely to the 
modification of the definitions of QMACs and QNECs. These comments have 
been shared with IRS Tax Exempt and Government Entities, Employee 
Plans, which administers the pre-approved plan program.
    The comments also included questions relating to the application of 
section 411(d)(6) in cases in which a plan sponsor seeks to amend its 
plan to apply the rules in this regulation. The application of section 
411(d)(6) is generally outside the scope of these regulations. However, 
if a plan sponsor adopts a plan amendment to define QMACs and QNECs in 
a manner consistent with these final regulations and applies that 
amendment prospectively to future plan years, section 411(d)(6) would 
not be implicated. Moreover, in the common case of a plan that provides 
that forfeitures will be used to pay plan expenses incurred during a 
plan year and that any remaining forfeitures in the plan at the end of 
the plan year will be allocated pursuant to a specified formula among 
active participants who have completed a specified number of hours of 
service during the plan year, section 411(d)(6) would not prohibit a 
plan amendment adopted before the end of the plan year that permits the 
use of forfeitures to fund QMACs and QNECs (even if, at the time of the 
amendment, one or more participants had already completed the specified 
number of hours of service). This is because all conditions for 
receiving an allocation will not have been satisfied at the time of the 
amendment, since one of the conditions for receiving an allocation is 
that plan expenses at the end of the plan year are less than the amount 
of

[[Page 34471]]

forfeitures. See Sec.  1.411(d)-4, Q&A-1(d)(8) (features that are not 
section 411(d)(6) protected benefits include ``[t]he allocation dates 
for contributions, forfeitures, and earnings, the time for making 
contributions (but not the conditions for receiving an allocation of 
contributions or forfeitures for a plan year after such conditions have 
been satisfied), and the valuation dates for account balances'').
    These regulations are substantively the same as the proposed 
regulations. However, the Treasury Department and the IRS have 
determined that the distribution requirements referred to in the 
existing definitions of QMACs and QNECs in Sec. Sec.  1.401(k)-6 and 
1.401(m)-5 are more appropriately characterized as distribution 
limitations (consistent with the heading of Sec.  1.401(k)-1(d)), and, 
accordingly, these definitions have been amended to refer to 
distribution limitations.

Effective/Applicability Date

    These regulations are effective on July 20, 2018.
    These regulations apply to plan years beginning on or after July 
20, 2018. However, taxpayers may apply these regulations to earlier 
periods.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations. 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, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, notices and other guidance 
cited in this preamble are published in the Internal Revenue Bulletin 
(or Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at http://www.irs.gov.

Drafting Information

    The principal author of these regulations is Angelique Carrington, 
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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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. 401(m)(9) and 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) Applicability 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 plan years ending on or after July 
20, 2018.

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 limitations 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 
limitations 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 plan years ending on or after July 20, 2018.

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

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: July 13, 2018.
 David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2018-15495 Filed 7-19-18; 8:45 am]
BILLING CODE 4830-01-P