Apple Growth Partners

Don’t Miss this Critical Component of 401(k) Plans

By Krista Steedly, MAcc

The beginning of the new year marks an opportune time for plan sponsors to review their 401(k) plans. One area that should be reviewed is the plan’s forfeiture account. This is an often-forgotten aspect of plans, but it is imperative plan sponsors understand forfeitures and make sure they are handled in accordance with the plan document.

The following are areas plan sponsors need to consider when reviewing the forfeiture account:

  1. Know how to use the forfeitures– Forfeited assets are required to be distributed in ways that benefit the plan and the participants. This may include the payment of plan expenses (such as recordkeeping and audit fees), reduction of employer contributions, and allocation of additional contributions. The plan document and related adoption agreement describe how the forfeitures may be used. Plan sponsors that do not follow the terms of the plan document risk plan disqualification.
  2. Know when to use the forfeitures– It is important that plan sponsors not only know how forfeitures are to be used but that they also know when forfeitures are to be used. In general, forfeitures must be used by the end of the plan year during which they were transferred to the forfeiture account. In some cases, they may be used by the end of the plan year following the year of transfer. It cannot be emphasized enough – plan sponsors must review their plan document to determine how and when forfeitures can be used.
  3. Correct the problem if the forfeitures have built up over the years or if you don’t know what makes up the balance in the account – Plan sponsors need to know the breakdown of the amounts in the forfeiture account. Frequently, when there has been a change of investment custodians or recordkeepers, the history of the forfeiture is lost or misplaced. Are uncashed checks included? Were other plan assets transferred to the plan for which there is no accounting? The Internal Revenue Service (IRS) and the Department of Labor (DOL) require plan sponsors to distribute forfeited assets on a timely basis. If forfeitures are unallocated for longer than permitted in the plan document, plan sponsors can correct this by using the IRS Employee Plans Compliance Resolution System (ECPRS) which may include self-correction. In recent years, both the IRS and DOL have stepped up their scrutiny of forfeitures that have increased year after year.
  4. Stay up-to-date with new laws and regulations – Newly issued IRS final regulations now permit funding of non-elective contributions (QNECs), qualified matching contributions (QMACs), and safe harbor contributions with forfeited assets. It is important to ensure the plan document permits the use of forfeitures for these purposes, and if not, consider amendment of the plan document.

Managing forfeiture accounts requires maintaining good records and understanding the provisions outlined in the plan document. Additionally, plan sponsors should work with recordkeepers to know the status of their plan’s forfeiture account and to understand the forms required by the recordkeeper to use the forfeitures properly. Proper treatment of forfeitures is an important aspect of operational compliance. Contact me to discuss forfeiture accounts for your 401(k) plan.