[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
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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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