Utilizing Plan Forfeitures
When a plan participant leaves a Company, any non-vested employer contributions are forfeited. These forfeitures are often accumulated in a separate account, but remain in Plan assets. How these forfeitures should be utilized is typically specified in the Plan document. Most commonly, they are either used to reduce future employer contributions or to settle expenses. In these situations, the IRS requires that forfeited accounts be utilized no later than the year following the forfeiture.
In the event that the Plan document requires the reallocation of forfeitures to remaining participants, that reallocation is required to take place in the year the forfeitures occurred.
Improper treatment of forfeitures could compromise the tax status of the Plan. Mistakes should be corrected by the Plan Sponsor using the IRS’s Employee Plans Compliance Resolution System (EPCRS). Plan Sponsors are well advised to monitor forfeitures to assure that they are properly utilized in the appropriate period.
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