IRS Guidance

IRS Issues Final Regulations Approving Forfeitures to Fund QNECs, QMACs

The IRS and Department of the Treasury have issued final regulations amending the definitions of qualified nonelective contribution (QNEC) and qualified matching contribution (QMAC), settling the issue of whether participant forfeitures can be used to fund QNECs and QMACs.

QNECs and QMACs are types of employer contributions to qualified retirement plans commonly used to correct certain contribution testing failures in 401(k)-type plans. Unless certain safe harbor exemptions apply, 401(k) plans generally must satisfy rules that limit the disparity between the average deferrals of highly compensated employees (HCEs) and nonhighly compensated employees (nonHCEs). Similarly, in nonsafe harbor situations, 401(k) plans must satisfy rules that limit the disparity between average matching contributions of HCEs and nonHCEs. To correct testing failures under these rules, employers can make QNECs and QMACs.

These final regulations finalize the proposed regulations issued by the IRS in January 2017, which first altered the definitions of QNEC and QMAC to allow the use of forfeitures in funding QNEC and QMAC contributions. Before 2017, the IRS and Treasury Department interpreted the 401(k) regulations in a manner that did not permit the use of participant forfeitures to fund these employer contributions.

The final regulations are scheduled to be published as early as July 20 in the Federal Register, and will take effect on that publication date.


IRS Releases 2018 Detailed Instructions for IRA Reporting

The IRS has released the 2018 tax year Instructions for Forms 1099-R and 5498. This release was much anticipated because of tax law changes resulting from the Tax Cuts and Jobs Act in December 2017 and the Bipartisan Budget Act in February 2018. The release of these detailed instructions was delayed substantially from prior years.

The following changes are included in the 2018 Instructions.

  • No recharacterizing of 2018 or later Roth IRA conversions, or 2018 or later retirement plan-to-Roth IRA rollovers
  • Special rules for victims of 2016 and 2017 natural disasters
  • New Form 1099-R reporting code for a qualified plan loan offset distribution due to severance from employment or termination of a plan
  • New Form 5498 reporting code for rollover of offset retirement plan loans
  • Special reporting for U.S. Armed Forces in designated combat zones

Although the IRS previously released the 2018 version of Form 5498, IRA Contribution Information, as of this writing, the IRS had not released the 2018 version of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.


IRS Releases 2018 Form 5498 for IRA Contribution Reporting and Updates General Instructions

The IRS has released the finalized version of the 2018 tax year Form 5498, IRA Contribution Information. The separate instructions for the 2018 form—Instructions for Forms 1099-R and 5498—had not yet been released at the time of this writing. The IRS also released an updated version of the 2018 General Instructions for Certain Information Returns.

Form 5498

Form 5498 is used by IRA custodians, trustees and issuers to report IRA contributions, rollovers, conversions, recharacterizations, fair market value, and other IRA contribution-related information. In addition to date and deadline changes, this 2018 version was updated with changes to Box 13a, now titled “Postponed/late contrib.” The form instructions indicate the following changes for Box 13c, Code. Both revisions were a result of changes made by the Tax Cuts and Jobs Act of 2017.

  • Code FD, PL115-97 for the Sinai Peninsula of Egypt, has been added as a code for late contributions made by individuals who serve in this qualified hazardous duty area.
  • Code PO is a new code to use for retirement plan participants who make rollovers of qualified retirement plan loan offsets.

General Instructions for Certain Information Returns

The 2018 General Instructions for Certain Information Returns was first released in late January, but was updated further and rereleased on July 5. The General Instructions are update every year for dates, limitations, and IRS penalties for incorrect reporting. Also see the “What’s New” section for additional revisions.

As of this writing, the IRS had not released the 2018 versions of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or the detailed instructions for the Forms 1099-R and 5498.