A plan forfeiture account holds the non-vested balances of participants that leave the plan prior to fully vesting. It is important to remember that these are plan assets, meaning they must be used for the benefit of the plan, the participants, and beneficiaries.

Recent litigation has placed a spotlight on best practices for the management and use of forfeiture accounts. According to the IRS, defined contribution plans may use forfeitures to pay for plan administrative expenses, reduce employer contributions, or reallocate among other plan participants in accordance with plan terms.1

Communication with the plan recordkeeper is key to understanding the status of existing forfeiture account(s), as well as usage permitted by the plan document. It is important to make sure that your plan document permits your intended use of forfeitures before committing to using them.

Consider these best practices:

Maintain accurate records

It is critical to track the source of the forfeiture account balances as funds from certain sources may have use restrictions on them. This is a major responsibility for a recordkeeper, and if or when a service provider change occurs it is important that the data transfer of all existing forfeiture amounts is accurate.

Adhere to the plan document

The Department of Labor (DOL) requires that forfeiture balances be used for the benefit of the plan and plan participants. The funds must be used according to the guidelines outlined in the plan document. Some plans have more strict rules on the use of the funds than others, but it is essential that the plan document is adhered to, or the plan may be disqualified. Examples of how forfeitures may be used in defined contribution plans include: paying reasonable retirement plan expenses, reducing future employer contributions, allocating among participants as additional contributions, and/or restoring previously forfeited participants accounts.

Allocate in a timely manner

The IRS and the DOL expect plans to allocate forfeited funds in a timely manner. Generally, plan administrators must use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.2

Sources

  1. Prop. Treas. Reg. § 1.401-7(b). Despite IRS guidance, there has been recent litigation on the issue of whether ERISA fiduciaries may exercise discretion to use plan forfeitures to reduce employer contributions.
  2. Prop. Treas. Reg. § 1.401-7(b). This proposed regulation may be relied upon pending finalization.