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

April 04, 2023 (3 min read)

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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