The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Ohio is representative of a common inquiry related to plan forfeitures. The advisor asked:
“Can you clarify the rules related to use of 401(k) plan forfeitures, please?”
Highlights of the Discussion
Forfeitures occur when a terminated plan participant gives up his or her nonvested contributions to the plan. For the use of forfeitures – read the instructions – the plan document, that is. The governing plan document will specify how the plan sponsor may use the forfeitures. Permissible options include: (1) reducing future employer contribution obligations to the plan, including corrective contributions; (2) reallocating among the accounts of active plan participants; or (3) paying plan expenses. As a result of final regulations (T.D. 9835) issued in 2018, forfeitures may also be used to fund corrective contributions, i.e., qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs).
Regarding when plan forfeitures should be used, the general rule is that dollars in a plan’s forfeiture account should be used or allocated in the plan year incurred; they should not be allowed to accumulate from plan year to plan year. According to an IRS article, “Fixing Common Plan Mistakes: Improper Forfeiture Suspense Accounts,” “Forfeitures must be used or allocated in the plan year incurred. The Code does not authorize forfeiture suspense accounts to hold unallocated monies beyond the plan year in which they arise.” This would preclude a plan from carrying over plan forfeitures to subsequent plan years (see also IRS Revenue Rulings 80-155 and 84-156).
However, the article goes on to reference a limited exception to the general rule discussed above. The publication states: “For those plans that use forfeitures to reduce plan expenses or employer contributions there should be plan language and administrative procedures to ensure that current year forfeitures will be used up promptly in the year in which they occurred or in appropriate situations no later than the immediately succeeding plan year.” The IRS has not provided what would constitute an “appropriate situation,” however.
Conclusion
Plan forfeitures should not be allowed to sit around gathering dust in a plan. Check the plan document for specific provisions on the use of forfeitures.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2019, Retirement Learning Center, LLC. Used with permission.
