On July 20, 2018, the Internal Revenue Service (IRS) issued final regulations providing that employer contributions to a 401(k) plan are treated as qualified matching contributions (QMACs) or qualified nonelective contributions (QNECs) at the time that contributions are allocated to participants' accounts, as long as the contributions satisfy applicable nonforfeitability and distribution requirements. Employer contributions do not have to meet those requirements or limitations when they are first contributed to the plan. The regulations affect participants in, beneficiaries of, employers maintaining and administrators of tax-qualified plans that contain cash or deferred arrangements (CODAs) or provide for matching contributions or employee contributions. The final regulations are substantively the same as the proposed regulations.
To be considered a qualified CODA, a plan must satisfy several requirements, including certain requirements relating to distribution limitations, nonforfeitability of contributions and nondiscrimination of employer contributions. Employer contributions taken into account for purposes of applying the nondiscrimination requirements may include, in addition to contributions made pursuant to an employee's election, matching contributions that meet the distribution and nonforfeitability requirements of Internal Revenue Code Sections 401(k)(2)(B) and (C) (known as QMACs) and Code Section 401(m)(4) (C) (known as QNECs).
Under Code 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 Code Sections 401(k)(2)(B) and (C) are met.
A CODA satisfies the applicable nondiscrimination requirements if it satisfies the actual deferral percentage (ADP) test, which helps ensure that highly compensated employees (HCEs) cannot elect to defer a disproportionately higher amount of their salary. If the ADP test limits are exceeded, the employer must take corrective action to make sure that the limits are met. Similar threshold requirements under the actual contribution percentage (ACP) test apply to limit employer matching or employee contributions made on behalf of HCEs. In applying the ADP and ACP tests, employers may (under conditions set forth in the...