What is a forfeiture account?

Forfeitures most typically occur when a terminated participant who is not fully vested in the employer contribution portion of his or her account receives a plan distribution. The unvested portion is forfeited. Forfeitures can also occur when a plan utilizes automatic enrollment with an opt-out provision. If a participant opts out of the plan and elects to have his or her contribution returned to him or her, any match would be forfeited at that time. The forfeiture account serves as a temporary holding place until the funds can be used in accordance with the terms of the plan document.

When are forfeitures typically removed from participant accounts?

The unvested portion may be left in a participant’s account until the participant requests a distribution after a break in service occurs, or it can typically be moved into a forfeiture account upon the participant’s separation from service.*

Additional causes of forfeitures:

Are the assets in the forfeiture account invested?

The assets in the forfeiture account are typically invested in a cash equivalent, but other investment options may be appropriate. The forfeiture account investment is usually chosen when the account is set up and/or transitioned to the recordkeeper.

How can the forfeiture account be used?

Use of the funds in the forfeiture account is governed by the plan document. Plan sponsors should refer to their plan document to make sure forfeitures are addressed to determine when and how forfeiture funds can and must be used. Typical uses include:

• Paying plan administrative expenses, such as auditing, accounting, or recordkeeping fees
• Paying fees for annual administration and compliance services
• Offsetting company contributions
• Allocating funds back to plan participants as additional company contributions

When should forfeitures be used?

Typically, forfeitures should be allocated during the plan year in which the forfeiture occurred and should not be carried over into subsequent years. However, specific language in the plan document can allow for the forfeitures to be distributed the year following the year in which the forfeitures occur.

How often should the forfeiture accounts be monitored?

To ensure forfeitures are used in a timely manner, plan sponsors should monitor the forfeiture account on an ongoing basis and use accumulated amounts as soon as possible. For example, if certain plan fees are billed quarterly and the plan allows forfeitures to pay plan expenses, check the forfeiture account when quarterly invoices are received. Check with the plan administrator or recordkeepers to determine if they can automatically charge the forfeiture account first when plan expenses are due before charging the remaining balance to either the company or participant accounts.

What happens if forfeitures are not used in a timely manner?

The IRS Employee Plans Compliance Resolution System (EPCRS) has approved methods available under the Self-Correction Program (SCP) and options under the Voluntary Correction Program (VCP). For more information, visit www.irs.gov.