Learn more about the timely use of plan forfeitures

A plan that does not annually allocate forfeiture amounts may jeopardize its qualified plan status.

Defined contribution plans often provide employer contributions to participants, whether matching or nonelective, that are subject to a vesting schedule. When a participant terminates employment prior to becoming fully vested in those contributions, the unvested portion is forfeited on a date specified by the plan. While this process is generally straightforward, a plan may encounter challenges in determining how and when to use those forfeited assets appropriately.

Most plans provide that these amounts move temporarily to a forfeiture suspense account. Forfeiture account assets are plan assets to be used for the benefit of the plan. The plan document generally will contain provisions dealing with how and when these assets will be used. Depending on those provisions, forfeitures could be used to pay a plan’s reasonable administrative expenses, reduce employer contributions, or provide an additional allocation to participants.

When non‐vested money is forfeited and placed into a suspense account, it is important to be aware of the timing requirements. The general rule is that assets in a plan’s forfeiture account should be used or allocated in the plan year incurred. The IRS stressed the timeframe for using these assets back in the Spring 2010 issue of Retirement News for Employers.

A plan that does not annually allocate forfeiture amounts may jeopardize its qualified plan status. This common plan mistake may be corrected using the IRS’s Employee Plans Compliance Resolution System (EPCRS). Usually, this error can be corrected by allocating the forfeitures to all plan participants who should have received them had the forfeitures been allocated on time. If the plan was supposed to use forfeitures in another manner, other correction methods may be appropriate.

Best Practice

Monitor forfeiture suspense accounts regularly. The suspense account reports on Fidelity Plan Sponsor WebStation® provide convenient access to daily forfeiture account balances and provide access to each suspense account applicable to your plan. With proper controls in place, forfeitures can be reviewed regularly to ensure that they are used promptly and according to the terms of the plan.

For plan sponsor and investment professional use only.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Fidelity Investments Institutional Operations Company, Inc.

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