Effectively managing plan forfeitures

Managing forfeitures in a qualified retirement plan may appear simple, but the process can prove challenging.

Establish plan forfeiture procedures

As they administer their retirement plans, plan sponsors often must deal with plan forfeitures, which may occur when participants terminate employment before becoming fully vested. At first glance, managing forfeitures in a qualified retirement plan or 403(b) plan may appear simple, but the process can prove challenging. For example, the plan document must clearly define when and how the plan will use forfeitures. In addition, a plan sponsor should have established procedures for the timing and use of forfeitures to ensure compliance with plan terms and conditions.

The use of forfeitures has most recently been highlighted during Internal Revenue Service (IRS) audits. Some plan sponsors have been surprised to find that their plan documents don’t match how they actually administer plan forfeitures. Ensuring that forfeitures occur on a timely basis and are used according to the terms of the plan document will help mitigate compliance risk.

How can you use plan forfeitures?

It’s important that plan sponsors understand the proper use of forfeitures according to the plan document. Revenue Ruling 84-156 provides that forfeitures may be used to pay for a plan’s administrative expenses and/or to reduce employer contributions. As such, forfeitures generally may be used in four ways:

  • Reallocate forfeitures to eligible participants
  • Offset, or add to, other employer contributions due under the terms of the plan
  • Restore previously forfeited amounts to a rehired participant’s account, subject to plan terms
  • Offset a plan’s administrative expenses; please note that “settlor” expenses (expenses incurred as part of the employer’s role as settlor of the trust) should never be paid by the plan or trust

On January 18, 2017, the IRS issued proposed regulations that permit forfeitures to be used to fund safe harbor contributions, Qualified Non-Elective Contributions (QNEC) and Qualified Matching Contributions (QMAC). The IRS has stipulated that the proposed regulations may be relied upon immediately, even though final regulations have not yet been published.

Find out more about how forfeitures occur, timing, IRS rules, and how you can avoid potential issues. Download the full article (PDF) .

This material is provided by The Lincoln National Life Insurance Company, Fort Wayne, IN, and, in New York, Lincoln Life & Annuity Company of New York, Syracuse, NY, and their applicable affiliates (collectively referred to as “Lincoln”). This material is intended for general use with the public. Lincoln does not provide investment advice, and this material is not intended to provide investment advice. Lincoln has financial interests that are served by the sale of Lincoln programs, products and services.

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