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Regs ease up on employers’ matching 401(k) contributions

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in Office Management,Payroll Management

Employees are always vested in the amounts they contribute into their 401(k) plan accounts on a pretax basis. The same isn’t true for employer matching contributions, which means that 401(k) plans must account for forfeitures when employees leave before they become vested.

Forfeitures, for example, can be used to defray some plan costs. They can also be used to make corrective employer contributions, if the plan flunks the nondiscrimination tests. Proposed regulations would allow you to count certain corrective contributions toward these nondiscrimination requirements much later in the process.

You may rely on these proposed regs until the final regs are issued. (82 F.R. 5477, 1-18-17)

Dare to compare. To ensure that executives aren’t stashing away too much money in their 401(k) accounts, 401(k) plans have to pass a battery of nondiscrimination tests: the actual deferral test (the ADP test) and the actual contribution percentage test (the ACP test). Both tests compare employees’ and employers’ pretax deferrals and aftertax and employer contributions.

If a plan flunks either or both of those tests, the plan sponsor must make qualified employer matching contributions (QMACs) or qualified employer nonelective contributions (QNECs) into the accounts of nonhighly compensated employees. These QMACs and QNECs must meet certain nonforfeitability and distribution requirements.

Later may be better. Under the proposed regs, an employer contribution can count as a QMAC or QNEC when allocated to participants’ accounts, rather than when they’re first contributed to the plan, provided the nonforfeitability and distribution requirements are satisfied.

What’s the advantage: If your plan allows forfeitures to be applied in this manner, you won’t have to make any other contribution to square things up between your executives and everyone else.

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