Consider Your Options With Nonvested Participant Forfeitures
Employee benefit plans provide a combination of vested and non-vested assets. When employees leave a company before their matching 401(k) contributions have vested, they forfeit those amounts. This brief article reviews the options available to plan sponsors when dealing with these assets.
What To Do With Forfeited Dollars
Employee benefit plans provide a combination of vested and non-vested assets. When employees leave a company before their matching 401(k) contributions have vested, they forfeit those amounts. As a plan sponsor, you have four choices regarding what to do with forfeited dollars:
- Use them to offset plan expenses;
- Tap them to offset amounts needed for matching contributions for active participants;
- Re-allocate them evenly among active participants; and
- Return forfeited funds to former plan participants who rejoin the plan.
Many plan documents provide that forfeitures are first used to offset employer contributions, with any remainder used to pay expenses. The document will also state when these forfeitures are allocated, so it is important that you follow the plan document. You cannot let these amounts accumulate indefinitely. The IRS has shown in recent audits that it does not tolerate that practice.
What Does Your Plan Document Say?
Your plan document should describe your forfeiture policy. However, sometimes plan administrators do not review their plan documents and thus handle forfeitures inconsistently. Be sure that your administrative practice is in keeping with your plan document. It’s possible that, when you started the plan, you didn’t give much consideration to the forfeiture options. You may have used some boilerplate language. So when you check your document, think about whether it’s consistent with your current philosophy and practical needs. For example, if you currently distribute forfeitures among active participants but are looking for ways to lower plan expenses, you might amend your plan document to use forfeitures to offset plan fees.
How Do You Define Forfeiture?
Another important policy decision is defining the timing of forfeiture. Generally, it occurs immediately following a participant’s separation of service. Again, the plan document will state when the forfeiture will occur. The key is to administer the plan according to its terms. A violation of the terms may jeopardize the plan’s qualified status. However, the IRS’s correction program is available when errors occur.
For more information on 401(k) forfeitures, contact Michael Kovacs at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.