---
title: "Fun with Forfeitures"
date: 2016-06-08
author: "Site Admin"
featured_image: "https://pinnacle-plan.com/wp-content/uploads/2016/06/Forfeitures.avif"
categories:
  - name: "Newsletters"
    url: "/category/newsletters.md"
---

# Fun with Forfeitures

![Forfeitures](http://pinnacle-plan.com/wp-content/uploads/2016/06/Forfeitures.png)View This Newsletter: [Fun with Forfeitures](http://pinnacle-plan.com/wp-content/uploads/2016/06/2016-Benefit-Insights-June-Fun-with-Forfeitures.pdf)

Overview:

As participants in 401(k)/profit sharing plans, we know that a vesting schedule can apply to a portion of our account balance. But what happens to that non-vested portion after we terminate employment? Those monies are called “forfeitures” and there are strict rules governing how they can be used.

- What Is a Forfeiture? 
    - Putting it simply, a forfeiture is the non-vested portion of a participant’s account that he or she gives up in certain instances.
- What Isn’t a Forfeiture? 
    - Some amounts may appear similar to a forfeiture, but are not actually forfeitures
    - The newsletter lists amounts that are not considered to be forfeitures
- When do Forfeitures Occur? 
    - The plan document dictates the timing
    - Typically the forfeiture occurs on the earlier of the date the participant: 
        - Receives a complete distribution of his or her vested account balance, or
        - Incurs five consecutive one-year breaks in service.
- When is a Distribution “Complete”? 
    - Many plans include a provision that says if a participant terminates without any vested balance, he or she is treated as if a complete distribution has occurred.
- What is a One-Year Break in Service? 
    - Occurs on the last day of a plan year in which the employee works fewer than 501 hours
- How Are Forfeitures Used? 
    - Pay allowable plan expenses;
    - Reduce employer contributions (other than safe harbor contributions, Qualified Nonelective Contributions (QNECs) or Qualified Matching Contributions (QMACs)); and/or
    - Add to employer contributions.
- Can Forfeitures be Reinstated? 
    - Yes, but it is a very rare occurrence
- When Must Forfeitures be Used? 
    - IRS rules and plan document provisions dictate when they must be used.
    - Typically, that timing is either by: 
        - The end of the plan year in which they occur, or
        - The end of the plan year following the year in which they occur.
- What Can I Do To Get This Right? 
    - Proper treatment of forfeitures is something that is on the IRS’s radar
    - Familiarize yourself with the plan document and monitor the forfeiture account

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Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting for 401(k)/profit-sharing plans, defined benefit plans, cash balance plans, and 403(b) plans. Pinnacle Plan Design proudly serves businesses nationwide.