Help Clients With Forfeiture Funds “Clean the Slate”

Do you have clients who need help managing their forfeiture accounts? You may want to advise them to use 2025 to “clean the slate.”

In 2023, the IRS issued proposed regulations that address the use and timing of employee forfeiture funds in qualified retirement plans. These proposed codifying regulations became effective in 2024.

Forfeitures occur when an employee leaves a company before meeting vesting requirements. Non-vested amounts are generally released to the plan-level forfeiture account at participant termination or when a terminated participant reaches a five-year break in service.

The IRS says funds cannot sit in a forfeiture account indefinitely. They must be used within a specific time frame as defined in regulations and employers must follow the use of forfeitures as defined in their plan document. Failure to follow IRS regulations is considered an operational failure.

When to Use Forfeiture Funds

Forfeiture funds must be used by the end of the plan year following the year these dollars were added to the forfeiture account. If they’re not used to pay for plan expenses or to offset employer contributions, the remaining funds must be reallocated to participants and included in compliance testing.

The good news is that the IRS has given employers until the end of 2025 to address any past oversight in the timely use of forfeitures.

This is a great year for your clients to “clean the slate.” The IRS rule allows employers to treat forfeiture funds from previous plan years as if they were 2024 plan year forfeitures. Then employers can use them in the 2025 year-end annual compliance process.

“For employers, this means looking back to ensure any monies in the plan forfeiture account released prior to 2024, if not already used to pay plan expenses or offset employer contributions, are directly allocated to participant accounts,” said Angela Trefethen, senior director of retirement plans service at The Standard.

How to Use Forfeiture Funds

Consult a client’s plan document to see how forfeitures can be used. Some common possibilities include these:

• Apply the funds to plan expenses.
• Use the funds as an employer credit and apply to:
  • Employer matches
  • Employer profit sharing
  • Employer discretionary use
• Reallocate to participant accounts.

Speak to your local consultant to learn more about handling forfeiture funds.