Issue Snapshot - Plan Forfeitures Used for Qualified Nonelective and Qualified Matching Contributions


In general, elective deferrals are subject to the Actual Deferral Percentage (ADP) test and employee and matching contributions are subject to the Actual Contribution Percentage (ACP) test. When the ADP test is failed, additional contributions are often made in the form of Qualified Nonelective Contributions (QNECs) and/or Qualified Matching Contributions (QMACs), depending on plan terms.  This Snapshot discusses the July 2018 final regulations that allow employer contributions to a plan to qualify as qualified nonelective contributions (QNECs) or qualified matching contributions (QMACs) if they are nonforfeitable when allocated to participants’ accounts. 

IRC Sections and Treas. Regulations

  • IRC Section 401(k)
  • IRC Section 401(m)
  • Treas. Reg. Section 1.401(k)-2(b)
  • Treas. Reg. Section 1.401(k)-6
  • Treas. Reg. Section 1.401(m)-5
  • T.D. 9835, Definitions of Qualified Matching Contributions and Qualified Nonelective Contributions (Final regulations under IRC Sections 401(k) and Section 401(m))



A qualified plan that includes a cash or deferred arrangement (CODA) allowing for elective deferrals must comply with IRC Section 401(k). Similarly, a plan that provides for matching contributions and/or employee contributions must comply with IRC Section 401(m). Both IRC Section 401(k) and IRC Section 401(m) include nondiscrimination tests that apply to these types of contributions.

Elective deferrals are subject to the ADP test under IRC Section 401(k)(3). The test compares the average deferral percentages of highly and nonhighly compensated employees (HCEs and NHCEs). Matching and employee contributions are subject to the ACP test under IRC Section 401(m)(2), which is substantially similar to the ADP test except that employee and matching contributions are substituted for elective deferral contributions.

When a plan fails the ADP test, the employer sponsoring the plan can take various actions to correct the failed test. For example, the plan may provide that excess contributions will be distributed to HCEs. The plan may also provide for different testing options: for example, “otherwise excludable employees” may be tested if the plan’s eligibility requirements are more liberal than the minimum requirements in the Code and the regulations. Plans may also provide that the employer will correct a failed test by making supplemental contributions, often in the form of QNECs and QMACs. See Treas. Reg. Section 1.401(k)-2(b).


QNECs are employer contributions, other than matching contributions, that are not subject to an employee election but are subject to most of the same distribution restrictions that apply to elective deferrals. One notable exception is that unlike elective deferrals, QNECs currently can’t be distributed on account of an employee’s hardship. However, for plan years beginning after 2019, they can, pursuant to changes enacted by the Section 41114(a) of the Bipartisan Budget Act of 2018, P.L. 115-123. Under certain circumstances, an employer may treat QNECs as elective deferrals for purposes of the ADP test. In making QNECs – usually for NHCEs – an employer is essentially making supplemental employer contributions that are tested as if they were elective deferrals, enabling the plan to pass the ADP test.


Similarly, an employer may also, under certain circumstances, treat matching contributions as elective deferrals. QMACs are matching contributions that are eligible to be treated as elective deferrals for purposes of the ADP test. A QMAC is subject to the same distribution restrictions applicable to QNECs.

QMACs that an employer considers for the ADP test are disregarded in performing the ACP test - they cannot do “double duty.” Thus, the ACP test is not required if there are no employee contributions and the only matching contributions are QMACs that are counted as elective deferrals in the ADP test. For purposes of performing the ACP test, the employer may also, under certain circumstances, treat elective deferrals and/or QNECs as matching contributions.

General rules for QNECs and QMACs

and QMACs are subject to certain rules, such as the distribution restrictions described above. For example, unless the employee quits or the plan is terminated, QNECs may not be distributed until a participant attains age 59½. A plan must also contain enabling plan language to use QNECs, including a definite allocation formula for QNECs.

Prior to the issuance of the July 2018 regulations, QNECs and QMACs had to be fully vested when made to the plan, not simply fully vested when allocated to a participant’s account in the plan. This requirement precluded an employer from using forfeitures as QNECs or QMACs because forfeited amounts would not have been fully vested when originally contributed to an account under the plan.


Qualified plans that have a vesting schedule for employer contributions will generate forfeitures as employees terminate employment before fully vesting. Forfeitures must be used either to (i) fund employer contributions or (ii) pay plan expenses.

For any plan year, an employer might be making a variety of contributions to a 401(k) plan, such as discretionary profit-sharing contributions, matching contributions, and QNECs or QMACs necessary to enable the plan to pass the ADP and/or ACP test. Prior to the amended regulations, a plan could use forfeitures to satisfy expenses or make matching or discretionary profit-sharing contributions, but could not use forfeitures as QNECs or QMACs.

Prior to amendment, Treas. Reg. Section 1.401(k)-6 provided that QNECs and QMACs must be nonforfeitable “when they are contributed to the plan.” Treas. Reg. Section 1.401(m)-5 provided that QNECs and QMACs must be nonforfeitable “at the time the contribution is made.” The IRS had interpreted both of these provisions to mean that QNECs and QMACs must be nonforfeitable when the contributions were made to the plan. This interpretation precluded employers from using forfeitures as QNECs or QMACs because these amounts would have accrued only after a participant incurred a forfeiture of benefits and, thus, would not have been nonforfeitable “when they are contributed to the plan.”

On July 20, 2018, the IRS released final regulations that changed the definition of QNECs and QMACs. Under the revised regulations, employer contributions to a plan will qualify as QNECs or QMACs if they are nonforfeitable when they are allocated to participants’ accounts, and need not be nonforfeitable when they are contributed to the plan. (See T.D. 9835, amending Treas. Reg. Section 1.401(k)-6 and proposed Treas. Reg. Section 1.401(m)-5.), 


Plan A is a traditional 401(k) plan with 100 participants, 20 of whom are HCEs. The plan uses a 6-year graded vesting schedule for the employer’s discretionary profit-sharing contributions, and the plan document provides that ADP test failures will be corrected using QNECs. In the 2018 plan year, 5 employees terminated employment prior to being fully vested, resulting in $20,000 of forfeitures. For plan year 2018, Plan A may provide that the $20,000 in forfeitures will be used as QNECs to the extent necessary for Plan A to pass the ADP test.

Audit tips

  • Determine if the plan needed to make either a QNEC, or a QMAC, or both to pass the ADP and/or ACP tests.
  • Determine if the plan provides for QNECs and/or QMACs as a corrective methodology.
  • Review plan language to determine the correct funding source for QNECs and QMACs.