View This Newsletter: Fun with Forfeitures

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

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.