Under existing Internal Revenue Service (IRS) regulations, qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) and certain safe harbor contributions must be nonforfeitable (100 percent vested) at the time the amounts are contributed to an employer’s plan. Until now, the IRS has interpreted this requirement to prohibit employers from using forfeitures to fund QNECs, QMACs and certain safe harbor contributions. According to the IRS, using forfeitures for this purpose was impermissible because contributions allocated to a plan’s forfeiture account were subject to a vesting schedule when the contributions were first made to the plan (as employer matching or profit sharing contributions). As result, the IRS took the position that forfeitures could never be used to fund QNECs, QMACs or certain safe harbor contributions even if the forfeitures were fully vested at the time they were ultimately re-allocated to participant accounts as QNECs, QMACs or safe harbor contributions.

The proposed regulations clarify that QNECs, QMACs and safe harbor contributions must be fully vested only at the time the contributions are allocated to participant accounts, rather than when first contributed to the plan. Although the regulations are proposed, they can be relied upon immediately, which means that forfeitures may now be used to fund such contributions.

This is a welcome change for employers, who will now be able to use existing forfeitures to fund corrective contributions and safe harbor contributions, rather than making additional contributions to the plan for that purpose. However, before employers begin using forfeitures to fund QNECs, QMACs or safe harbor contributions, it is important that employers review their plan documents carefully to ensure that the plans allow forfeitures to be used to reduce employer contributions and do not otherwise prohibit the use of forfeitures to fund QNECs, QMACs and/or safe harbor contributions.