Since at least 2010, the IRS has publicly stated that forfeitures must be used by the end of the plan year in which the forfeiture occurred, or as soon as possible thereafter. Some IRS pre-approved prototype or volume submitter plans specifically provide that forfeitures must be used no later than the last day of the plan year following the plan year in which the forfeiture occurs. In addition, Department of Labor auditors are also asking plan administrators why forfeitures are not being used in a timely manner. Failure to properly administer forfeitures could result in an expensive and time consuming correction process and possible claims that the plan administrator breached its fiduciary duty by not administering the plan in accordance with its terms.
Forfeitures arise when an employee terminates employment prior to completing the service necessary to be fully vested in the company’s matching or profit sharing contributions that have been allocated to the employee’s account. The forfeited amounts are placed in a suspense account to be used in accordance with directions given by the plan administrator to the record keeper.
The plan document will include language describing how forfeitures may be used. We typically see that forfeitures may be used to pay plan expenses, offset employer matching contributions, or be added to the company’s profit sharing contributions. The plan administrator should review the plan’s forfeiture provision so to understand the administrator’s options for using forfeitures and the deadline by which such action should be taken. The plan administrator should document the reasons for choosing one option over another, and confirm with the record keeper that its decision will be applied to all of the Plan’s forfeiture or suspense accounts.