Using the Forfeiture Account

When participants who are not fully-vested in their company contribution accounts terminate employment, their non-vested monies are usually moved into a forfeiture account.  Depending on the terms of the plan document, this normally happens when the employee takes a distribution of his vested balance, or, if sooner, after he has been terminated for five years.

Once assets are moved to the forfeiture account, the Employer needs to be proactive in making sure that those assets are discharged timely and in accordance with the terms of the plan’s legal document.  The document is required to describe how the forfeiture account is to be used.  It may indicate that the money in the forfeiture account is allocated to the remaining plan participants (in much the same way as an employer profit sharing or matching contribution might be allocated), or it may indicate that the forfeiture account can be used by the Employer to help reduce the funding of an upcoming company contribution.  In addition, the document might provide that the forfeiture account be used to pay for certain administrative expenses. 

Regardless of how the document requires the forfeiture account to be discharged, it is important to understand that the IRS does not allow the forfeiture account to sit unused for a long period of time.  The IRS requires that the forfeiture account must be used or allocated each year.  Revenue Ruling 80-155 stipulates that in order for a plan to be qualified for preferential tax treatment, all money in the plan must be allocated to participant accounts.  Since the forfeiture account is not a “participant account”, any assets in it must be used each year in accordance with the plan document. 

One situation we see occasionally occurs when the plan document requires the forfeitures to be used to reduce the company contribution, but the company is not intending to make a contribution for that year.  How is the forfeiture account used in that scenario?  In this case, the employer can declare a contribution equal to the amount of money in the forfeiture account, and then use the forfeiture account to pay for the contribution.

For Example:

Forfeiture account balance = $1,762.39 as of 12/31/12

The Employer does not intend to make a company contribution to the plan for 2012.  The document indicates that forfeitures are used to reduce contributions.

The Employer will allocate a profit sharing contribution of $1,762.39 for 2012.  It will be allocated according to the allocation formula in the document, to the employees who would otherwise be eligible to share in any year-end profit sharing contribution.  Likewise, if the plan contains a provision for a matching contribution, the $1,762.39 could be allocated as a match, in accordance with the matching allocation provisions.

Of course, if the document allows for forfeitures to be used to pay plan expenses, it would normally be best to use the forfeiture account for this purpose if the balance is small, otherwise allocating the forfeiture account as a contribution might result in the creation of a lot of small balances for participants.

Plan sponsors need to monitor the forfeiture account on a regular basis.  They need to make sure that the forfeiture account is used each year according to the terms of the plan document.  No forfeitures should be carried over from year-to-year.  Employers should review the terms of their document to see how forfeitures are required to be discharged, and may want to consider amending the plan terms if necessary, to facilitate the use of the account.  If you are unsure how to monitor the balance in the forfeiture account, or have questions about the use of the account, contact your Account Executive at RMS for assistance.

author

Annemarie Keehn has worked for over 29 years in the field of Defined Contribution Plan Administration. She graduated from Indiana University with a Bachelor of Science in Business Management. Anne joined RMS as an Account Executive in 2007. Her areas of expertise include qualified retirement plan administration and consulting, plan document underwriting, and compliance. She focuses the majority of her time at RMS on new client implementation and onboarding as well as assisting with marketing and new business initiatives.  She also maintains the plan document used by the firm and performs special research projects.  Anne has been awarded the designations of Qualified 401(k) Administrator and Qualified Pension Administrator from the American Society of Pension Professionals & Actuaries and has been approved by the Internal Revenue Service as an Enrolled Retirement Plan Agent. 

  

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