Forfeitures most often occur when a participant’s employment terminates before the participant’s accounts are 100% vesting. As terminated participants receive payment of their vested accounts (or have a 5-Year Break-in-Service, if sooner), the nonvested portion of their account transfers to the forfeiture account. Plan documents include specific rules on when forfeiture of nonvested balances is triggered. Sizeable amounts may accumulate in forfeiture accounts as this process is repeated over a period of years. IRS examiners have noted that employers are allowing forfeited money to stockpile in suspense accounts for years, which is not permitted. In response to this, the IRS issued a proposed rule to clarify how and when forfeitures must be used.
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- When to Purge Your Plan’s Forfeiture Account
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Under the proposed rule, forfeitures must be used no later than 12 months after the close of the plan year in which the forfeiture occurs. The new rule allows for a transition period that considers benefits forfeited before January 1, 2024 as having been incurred in the first plan year that begins on or after January 1, 2024. For a calendar plan year, this means that an accumulated forfeiture balance in your plan must be used by December 31, 2025. or a 2025 calendar plan year, forfeiture balances must be purged by December 31, 2026, and so on.
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- How To Use Forfeitures
- How To Use Forfeitures
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Plans may allow the use forfeitures in one of the following ways:
Pay plan administrative expenses
Reduce your employer contribution
Increase benefits in participants’ accounts by reallocating forfeitures to eligible participant accounts
Your Blue Ridge administrator is available to assist you in making sure that forfeitures are used timely and properly.
Many 401(k) plans will provide that forfeitures are used to pay administrative expenses, reduce employer discretionary or matching contributions (potential use may depend on the source in which the forfeitures arose) or reallocate as additional contributions. Most ESOPs will provide that forfeitures are reallocated to participant counts in the same manner as contributions. In any event the Plan document should be consulted for provisions as to the handling of forfeitures (and amended if necessary to align with administrative practice and/or Plan Sponsor objectives).
Contact your Blue Ridge plan administrator for details about how these rule clarifications affect your retirement plans.
