Many employers had long assumed that they could fund contributions to qualified plans made to avoid violating nondiscrimination rules from employee forfeiture accounts. Recently, the IRS finalized helpful new guidance to employers clarifying that forfeitures can be used fund these contributions.

QNECs, QMACs and Safe Harbor Contributions

Tax-qualified defined contribution plans (e.g., 401(k) and profit sharing plans) may not discriminate in favor of highly compensated employees (“HCEs”). There are two nondiscrimination tests that specifically apply to 401(k) plans: (1) the Actual Deferral Percentage (“ADP”) test, which applies to employee salary deferrals; and (2) the Actual Contribution Percentage (“ACP”) test, which applies to employer matching contributions, if any, and employee after-tax contributions.

These non-discrimination tests are complex and can be difficult to administer. If the employer fails one or both of these tests, one option it has is to make a qualified non-elective contribution (“QNEC”) or a qualified matching contribution (“QMAC”) to increase the average percentage deferrals or match for non-highly compensated employees (“NHCEs”) in comparison to the HCEs.

Additionally, employers can implement a “safe harbor” plan design to avoid ADP and ACP testing altogether. Safe harbor plans are exempt from this testing, so long as the employer makes a matching or non-elective contribution under one of the pre-approved safe-harbor formulas.

All of these contributions are subject to certain nonforfeitability and distribution requirements.

Treasury Regulations: Forfeitures Seemingly Not Permitted

It has been common practice for employers to make QMAC, QNEC, and safe harbor contributions using forfeitures from the accounts of participants who were not fully vested upon termination. The assumption was that, so long as the nonforfeitability and distribution requirements were met when these amounts were allocated to participant accounts, all of the applicable requirements would be met.

Under Treasury regulations, however, funds used to make these contributions cannot be “forfeitable” when first contributed to a plan. This suggested that forfeiture accounts could not be used to make QMAC, QNEC, and safe harbor contributions.

2018 Final Regulation: Helpful Clarification

The recently issued final regulations, however, provide that the amounts used to fund these contributions must be nonforfeitable and meet the distribution limitations at the time they are allocated to plan participants’ accounts, rather than when they are first contributed to a defined contribution plan. This provision clearly would allow employers to make use of forfeitures to fund these contributions.


To the extent that plan sponsors have not already revised their plan document and administrative procedures to permit the use of forfeitures to fund these contributions, they may wish to consider doing so now.

About the Author:

Eric W. Gregory is an Associate in Dickinson Wright’s Troy office where he assists clients in all areas of employee benefits law, including qualified retirement plans, welfare plans, and non-qualified compensation programs. Eric can be reached at 248-433-7669 or and you can visit his bio here.