401k Plan Regulation Change Small But Useful (article)
The IRS released final regulations on July 20, 2018 relating to the use of forfeitures to fund qualified matching contributions and qualified nonelective contributions in qualified retirement plans, including 401(k) plans.
As background, qualified retirement plans are subject to a number of discrimination rules. Specifically, 401(k) plans are subject to an actual deferral percentage (ADP) test and an actual contribution percentage (ACP) test found in Code Sections 401(k) and (m). To facilitate these rules, a plan can use a qualified nonelective contribution (QNEC) or a qualified matching contribution (QMAC).
Historically, forfeiture accounts, such as profit sharing forfeitures, could only be used to fund the QNECs and QMACs if they met all nonforfeiture and distribution requirements at the point of contributions were made to the plan. This limited the availability for funding for QNECs and QMACs.
According to these final IRS regulations, as long as the funds meet the nonforfeiture and distribution requirements at the time they are used to fund the QNECs and QMACs, and not necessarily at the time they are contributed to the plan, then it is permissible.
These regulations apply to plan years beginning on or after July 20, 2018; though, the proposed regulations in 2017 were written as reliance regulations.