Proposed Rule on Use of Forfeitures in Qualified Plans Released
The IRS has released a proposed rule intending to clarify the use and timing of the allocation of forfeitures in qualified retirement plans. Forfeitures generally arise when a participant is no longer able to accrue a benefit related to employer contributions subject to a vesting schedule, such as distribution of the participant's balance upon separation from service. In the Retirement News for Employers, Spring 2010 edition, the IRS noted that “audit experience illustrates some plans inappropriately allow forfeitures to accumulate for several years, when, in fact, forfeitures are to be exhausted during the plan year in which they are incurred, or no later than the following plan year in appropriate circumstances.”
The proposed rule indicates that forfeitures under a defined contribution plan may be used for one or more of the following purposes.
- To pay plan administrative expenses,
- To reduce employer contributions under the plan, or
- To increase benefits in other participants’ accounts in accordance with plan terms
Additionally, forfeitures will be used no later than 12 months following the close of the plan year in which the forfeitures were incurred under plan terms.
For defined benefit plans, the proposal indicates that the plan must expressly provide that forfeitures may not be applied to increase the benefits any employee would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions. However, the effect of forfeitures may be anticipated in determining the costs under the plan.
The proposal would be effective for plan years beginning on or after January 1, 2024. There is also a transition that stipulates that forfeitures incurred during plan years beginning before January 1, 2024, will be treated as having been incurred in the first plan year that begins on or after January 1, 2024. Comments on the rule may be submitted within 90 days of publication in the Federal Register.
