Forfeitures most typically occur when a terminated participant who is not fully vested in the employer contribution portion of his or her account receives a plan distribution. The unvested portion is forfeited. Forfeitures can also occur when a plan utilizes automatic enrollment with an opt-out provision. If a participant opts out of the plan and elects to have his or her contribution returned to him or her, any match would be forfeited at that time. The forfeiture account serves as a temporary holding place until the funds can be used in accordance with the terms of the plan document.
The unvested portion may be left in a participant’s account until the participant requests a distribution after a break in service occurs, or it can typically be moved into a forfeiture account upon the participant’s separation from service.*
|EVENT||FORFEITURE ACCOUNT ACTION|
|Missing Participant||The Internal Revenue Service (IRS) allows plan sponsors to forfeit missing participant account balances at the time of a distributable event as defined by the plan document (for example, the participant reaches age 59½). There is no specified amount of time that plan sponsors must wait before they do this, but plan sponsors must show they have done the proper due diligence to try to find the participant. If the participant is found, the plan sponsor must restore the account balance.|
|Exceeding the Salary Deferral/402(g) Limit||If the participant defers beyond the legal limit, the deferrals are returned to the participant and matching contributions associated with those deferrals are moved to the forfeiture account.|
|Failed Actual Deferral Percentage (ADP) Test||When deferrals are returned to a highly compensated employee due to a failed ADP test, any associated match is moved to a forfeiture account.|
|Failed Actual Contribution Percentage (ACP) Test||Upon ACP test failure, any vested match is returned to the highly compensated employee and the non-vested match is moved to a forfeiture account.|
The assets in the forfeiture account are typically invested in a cash equivalent, but other investment options may be appropriate. The forfeiture account investment is usually chosen when the account is set up and/or transitioned to the recordkeeper.
Use of the funds in the forfeiture account is governed by the plan document. Plan sponsors should refer to their plan document to make sure forfeitures are addressed to determine when and how forfeiture funds can and must be used. Typical uses include:
Typically, forfeitures should be allocated during the plan year in which the forfeiture occurred and should not be carried over into subsequent years. However, specific language in the plan document can allow for the forfeitures to be distributed the year following the year in which the forfeitures occur.
To ensure forfeitures are used in a timely manner, plan sponsors should monitor the forfeiture account on an ongoing basis and use accumulated amounts as soon as possible. For example, if certain plan fees are billed quarterly and the plan allows forfeitures to pay plan expenses, check the forfeiture account when quarterly invoices are received. Check with the plan administrator or recordkeepers to determine if they can automatically charge the forfeiture account first when plan expenses are due before charging the remaining balance to either the company or participant accounts.
The IRS Employee Plans Compliance Resolution System (EPCRS) has approved methods available under the Self-Correction Program (SCP) and options under the Voluntary Correction Program (VCP). For more information, visit www.irs.gov.
* If a plan has a graded vesting schedule and the participant is invested only in mutual funds and/or institutionally controlled contracts, the participant must take a withdrawal from the plan accounts or be separated for at least five years before the non-vested amounts can be forfeited.
Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.