Matching contributions are subject to different vesting requirements depending on: the type of plan to which they are made, and whether the matching contribution is a specific type, such as a Qualified Matching Contribution (QMAC). This Snapshot discusses the different vesting requirements for matching contributions to a defined contribution plan, other than a non-electing church plan or a governmental plan. IRC Sections and Treasury Regulations IRC Section 401(k)(11) IRC Section 401(k)(12) IRC Section 401(k)(13) IRC Section 401(m)(10) IRC Section 401(m)(11) IRC Section 401(m)(12) IRC Section 411(a)(2)(B) IRC Section 411(d)(3) Reg. Section 1.401(k)-3 Reg. Section 1.401(k)-4 Reg. Section 1.401(k)-6 Reg. Section 1.401(m)-3 Reg. Section 1.401(m)-5 Resources Rev. Rul. 2007-43, 2007-28 I.R.B. 45 Notice of Proposed Rulemaking Reg-131643-15, 82 FR 5477 (Proposed regulations under 1.401(k) and 1.401(m)) EP Phase I - Vesting EP CPE 2011- Safe Harbor 401(k) Plans Issue Snapshot - Plan Forfeitures Used for Qualified Non-Elective and Qualified Matching Contributions Analysis General Vesting Requirements The general vesting rules for employer contributions, including matching contributions, to qualified defined contribution plans are in IRC Section 411(a)(2)(B). There are two alternative minimum vesting schedules. Under the first option, contributions must be 100% vested when a participant completes 3 years of service (commonly referred to as 3-year cliff vesting). Under the second option, contributions vest gradually over 6 years, and a participant must be 100% vested upon completing 6 years of service. These minimum vesting schedules are the longest time periods, or most restrictive vesting rules, a plan can use to comply with the IRC Section 411(a)(2)(B) minimum vesting standards. A plan can have more generous terms that provide for faster vesting, including immediate vesting. The table below compares the minimum vesting schedules. Full Years of Service Completed 6-Year Graded Vesting IRC Section 3-Year Cliff Vesting IRC Section Less than 2 years 0% 0% 2 years 20% 0% 3 years 40% 100% 4 years 60% 100% 5 years 80% 100% 6 years 100% 100% Example 1: John is a participant in a 401(k) plan that provides for elective deferrals and matching contributions and no other contributions. The plan is not a safe harbor 401(k) plan, and the matching contribution is not a QMAC. The plan provides that matching contributions are 100% vested after 3 years of service. John terminates employment after completing 2 years of service. He is 0% vested in his matching contributions account in the plan. (John’s elective deferrals, however, are always 100% vested.) The plan complies with IRC Section 411(a)(2)(B). Example 2: Same as example 1, except that the plan has a 6-year graded vesting schedule for matching contributions. John is 20% vested in his matching contributions after completing 2 years of service. The plan complies with IRC Section 411(a)(2)(B). Matching Contribution Vesting in Safe Harbor 401(k) Plans Safe harbor 401(k) plans require employer contributions which may be either nonelective or matching. Additional matching contributions may also be made to the plan. The additional contributions can be subject to any permissible vesting schedule under IRC Section 411(a)(2)(B). ADP safe harbor contributions Matching contributions made to a safe harbor 401(k) plan that is not a Qualified Automatic Contribution Arrangement (QACA) must be 100% vested at all times in order to satisfy the Actual Deferral Percentage (ADP) test safe harbor. Matching contributions to a QACA safe harbor 401(k) plan must be 100% vested after a participant completes no more than 2 years of service to satisfy the ADP test safe harbor. See IRC Sections 401(k)(12) and 401(k)(13) and Reg. Section 1.401(k)-3. Example 3: Employer A maintains a non-QACA safe harbor 401(k) plan. The plan provides a basic matching contribution equal to 100% of the first 3% of compensation deferred plus 50% of the next 2% of compensation deferred to the plan. The matching contribution is 100% vested at all times. The plan is deemed to satisfy the ADP test provided that all of the remaining requirements of IRC Section 401(k)(12) are met. Example 4: Employer B maintains a QACA safe harbor 401(k) plan. The plan provides a basic matching contribution equal to 100% of the first 1% of compensation deferred plus 50% of the next 5% of compensation deferred to the plan. The matching contribution is 100% vested after 2 years of service. The plan is deemed to satisfy the ADP test provided that all of the remaining requirements of IRC Section 401(k)(13) are met. ACP safe harbor contributions Matching contributions to a safe harbor 401(k) plan do not have to be 100% vested at all times in order to be deemed to satisfy the Actual Contribution Percentage (ACP) test. Instead, matching contributions can be subject to any permissible vesting schedule under IRC Section 411(a)(2)(B) and are deemed to satisfy the ACP test, provided that the plan is a safe harbor plan for purposes of the ADP test, and the matching contribution: Does not take into account deferrals and/or employee contributions (sometimes referred to as “after-tax employee contributions”) exceeding 6% of the participant’s safe harbor compensation (“safe harbor compensation” is regular, IRC Section 414(s) compensation, except no dollar cap, other than the IRC Section 401(a)(17) cap, can apply); Does not increase in rate as the level of elective deferrals and/or employee contributions increases; If discretionary, does not exceed more than 4% of a participant’s safe harbor compensation; and For any highly compensated employee, is not made at a greater rate than that for any nonhighly compensated employee at the same level of elective deferrals and/or employee contributions. Where the ADP test is satisfied in a non-QACA safe harbor 401(k) plan by providing the basic matching contribution, and no other matching contributions are made, the matching contribution must be 100% vested at all times and is deemed to satisfy the ACP test because it complies with the 4 requirements listed above. Similarly, a non-QACA safe harbor 401(k) plan that uses an enhanced matching contribution instead of the basic matching contribution will be deemed to satisfy the ACP test provided that it does not take into account deferrals and/or employee contributions that exceed 6% of safe harbor compensation and, if employee contributions are permitted under the plan, the second and fourth requirements above are met with respect to employee contributions. A safe harbor 401(k) plan that is deemed to satisfy the ADP test with a 3% non-elective employer contribution may also permit discretionary matching contributions that are subject to any permissible vesting schedule under IRC Section 411(a)(2)(B). Those matching contributions are deemed to satisfy the ACP test provided they comply with the 4 requirements listed above. See IRC Sections 401(m)(11) and 401(m)(12) and Reg. Section 1.401(m)-3. Example 5: Plan C is a safe harbor 401(k) plan that is deemed to satisfy the ADP test using a 3% non-elective contribution. The plan also provides matching contributions equal to 50% of each eligible participant’s elective contributions that do not exceed 6% of compensation. There are no other matching contributions to the plan. The plan meets all other requirements for a 401(k) safe harbor plan. The matching contributions are fully vested after 3 years of service. The matching contributions are deemed to satisfy the ACP test safe harbor provided that the remaining requirements of IRC Section 401(m)(11) are met. SIMPLE 401(k) Plan Matching Contribution Vesting Matching contributions made to a SIMPLE 401(k) plan must be fully vested when made. The plan may not provide for any matching contributions beyond the required employer nonelective or matching contribution. IRC Section 401(k)(11)(B). See Reg. Section 1.401(k)-4. Example 6: Employer A maintains a SIMPLE 401(k) plan. Jim, an employee, received $50,000 in compensation for the year and had elective deferrals of $2,000. Employer A makes matching contributions for Jim of $1,500, which equals 3% of his compensation, the maximum percentage that can be matched under IRC Section 401(k)(11). Matching contributions under the plan are always fully vested. The matching contributions are deemed to satisfy the ACP test. IRC Section 401(m)(10). Qualified Matching Contributions QMACs are matching contributions that are eligible to be treated as elective contributions for purposes of the ADP test. A QMAC is subject to most of the same distribution restrictions applicable to elective contributions. One notable exception is that unlike elective deferrals, QMACs 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. QMACs that an employer takes into account for the ADP test are disregarded in performing the ACP test - they cannot do “double duty.” QMACs must be nonforfeitable “when they are contributed to the plan.” Reg. Section 1.401(k)-6. Reg. Section 1.401(m)-5 similarly provides that a QMAC must be nonforfeitable “at the time the contribution is made.” On January 18, 2017, proposed regulations were published in the Federal Register that would change the definition of QMACs. Under the proposed regulations, employer contributions to a plan will qualify as QMACs if they are nonforfeitable when they are allocated to participants’ accounts, and need not be nonforfeitable when they are contributed to the plan. Taxpayers may rely on the proposed regulations. See Plan Forfeitures Used for Qualified Non-Elective and Qualified Matching Contributions for a detailed discussion of the proposed regulations. Other Vesting Requirements Applicable to Matching Contributions A participant must be 100% vested at normal retirement age. Full vesting is also required on plan termination. In the case of a partial termination of the plan, all affected participants must be fully vested in all amounts credited to their accounts in the plan. See IRC Section 411(d)(3) and Rev. Rul. 2007-43. Audit Tips Review the plan to determine if it permits matching contributions. Identify the vesting schedule for the matching contributions. Is the vesting schedule permitted under IRC Section 411(a)(2)(B)? Identify the employees who are eligible to receive matching contributions. In a traditional safe harbor 401(k) plan, are matching contributions that are intended to satisfy the ADP test safe harbor 100% vested at all times? In a QACA safe harbor 401(k) plan, are matching contributions that are intended to satisfy the ADP test safe harbor 100% vested after no more than 2 years of service? If a SIMPLE 401(k) plan, verify that all contributions are 100% vested.
