Retirement plans can be complex, and keeping up with the latest regulations is crucial. One recent change concerns how employers oversee forfeited contributions – money contributed to an employee’s retirement account that becomes unavailable to them due to factors like leaving the company before becoming fully vesting. Forfeitures typically result in the accumulation of funds or assets within the plan that are no longer attributed to any plan participant.
The New Deadline: Using Forfeitures Within 12 Months
As of 2024, Proposed Treasury Regulation 1.401-7 stipulates that forfeited contributions in defined contribution plans (for example a 401(k) plan) must be used within 12 months of the plan year’s end in which they arise. This means employers have a year to decide how to allocate these funds, which is a significant shift in how forfeitures are managed and also underscores the importance of timely and transparent utilization of these funds.
The reasoning behind the regulation is that such action would prevent the accumulation of unused forfeitures within employee benefit plans, meaning that these funds would be promptly allocated for their intended purpose. The 12-month utilization window is meant to encourage plan administrators to actively assess and deploy forfeited assets in a manner that aligns with the objectives of the plan and interests of the participants. The regulation also is intended to increase transparency and accountability in the management of such forfeitures – a 12-month deadline would require plan administrators to provide timely reports and disclosures on the handling of forfeited funds, thereby facilitating greater visibility and oversight by regulatory authorities and plan participants.
What Happens to Existing Forfeitures?
A transition rule does provide some breathing room for existing forfeitures. Any forfeitures accumulated before Jan. 1, 2024, are considered “grandfathered in” and have until the end of 2025 to be used. This allows employers time to adjust their procedures and use up any existing forfeited funds.
How Can Forfeitures Be Used?
There are several ways employers can utilize forfeited contributions under the new rules:
- Reduce Employer Contributions: Allows employers to use forfeitures to offset the company contributions to the plan.
- Pay Administrative Expenses: Forfeitures can be used to cover various administrative costs of the plan.
- Reallocation: In certain instances, forfeitures can be reallocated to eligible participant accounts.
Fiduciary Duty and Lawsuits
It’s important to note that employers have a fiduciary duty to act in the best interests of plan participants. Lawsuits have been filed in the past regarding how forfeitures are used. Employers should ensure their decisions on using forfeitures are fair and reasonable, following the plan document and applicable regulations.
Staying Compliant
Consulting with a benefits advisor can help employers understand the new regulations and ensure they are using forfeitures appropriately. By staying compliant, employers can avoid potential legal issues and ensure a well-managed retirement plan for their employees. Windham Brannon’s Employee Benefit Plan Practice is well-versed in plan compliance, ready to help you stay on top of the latest compliance and regulatory requirements, including forfeitures. For questions or more information, contact your Windham Brannon advisor today, or reach out to Anne Morris.
