04 Apr 2023

Don’t Take My Money! Treasury’s Proposed Rule Eases Plan Forfeiture Treatment

Qualified plan forfeitures occur when a participant severs employment before vesting fully in employer contributions, in accordance with the plan’s relevant vesting schedule. Leave too early and you leave something on the table—which is definitely unfortunate for the participant. But what can employers do with the forfeited portion of the account? Plan documents can provide that forfeitures (1) are reallocated to remaining eligible employees (not in a DB plan), (2) applied to offset the desired employer contribution, or (3) used to pay reasonable plan expenses. IRS rulings set forth rules for forfeitures that were difficult to administer, for example by not allowing forfeitures to carry to a subsequent plan year.  The problem: an administrator may not determine forfeitures until after the plan year ends. Plus, the break in service rules add uncertainty to whether a forfeiture may need to be restored. New proposed regs, if finalized, would provide answers, effective for plan years beginning on and after January 1. 2024. Plus, a transition rule may be applied earlier. Plan amendments will be in order.

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Related Content

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    Review the rules on vesting for DB and DC plans. Remember that SECURE 2.0 (Div. T of Pub. L. No. 117-328) changed the rules for part-time employees, now requiring that such employees become eligible after having completed 500 hours of service in each of two consecutive years of service (down from three). So, long-term part-time employees can be eligible to contribute to a 401(k) plan after two years of part-time employment.
  • Counting Service in Retirement Plans
    Learn more about how to count service for purposes of eligibility, vesting, and sometimes participation (like when participants can diversify out of employer securities). 

Legal Developments  

  • Court Overturns Guidance in DOL Rollover Advice
    A Florida district court vacated part of the 2021 Department of Labor (DOL) rollover guidance on investment advice fiduciaries (Am. Sec. Ass'n v. DOL, No. 8:22-cv-330-VMC-CPT (M.D. Fla. 2023)). In one of its FAQs, DOL said a recommendation to rollover a participant's retirement plan account to an IRA may be fiduciary investment advice when the advisor expects to give ongoing advice after the rollover. 
  • Fraud, Waste and Abuse: Spotlight on Ancillary Services
    See how managed care companies can minimize risk from providers engaging in fraudulent, abusive, and wasteful health care services and billing.
  • Road Testing SECURE 2.0's Auto-Enrollment Mandate for New DC Plans
    Some DC plans will have to gear up for mandatory automatic enrollment under the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328). Unless an exception applies, 401(k) and 403(b) plans established after December 28, 2022, must offer an “eligible automatic contribution arrangement" with automatic escalation and permissible withdrawal features starting with the 2025 plan year. 

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