Employer sponsored 401k retirement plans can contain retirement plan forfeitures, which are non-vested employer contributions of terminated participants.
There are several ways that retirement plan forfeitures can be utilized, and for anyone serving in a fiduciary capacity, it’s important to understand these parameters.
According to Vanguard commentary, “Avoiding pitfalls in retirement plan forfeitures”, guidance provided by the Internal Revenue Code (IRC) and relevant Internal Revenue Service (IRS) suggests that plan forfeitures may be used in four ways. They are:
- Reducing future employer contributions;
- Paying reasonable retirement plan expenses;
- Allocating among participants as additional contributions; and
- Restoring previously forfeited participant accounts
When plan sponsors use forfeitures to reduce future employer contributions (commonly used), forfeitures can satisfy some or all of the employer contribution funding instead of using new employer monies to fund the retirement plan.
There are expenses that are incurred for operating the retirement plan and the forfeitures can be used to satisfy paying those expenses. If the plan document allows for it, plan sponsors may allocate forfeitures as an additional employer contribution.
Finally, for certain rehired participants who repay plan distributions, they may buy back previously forfeited balances , in which case the plan sponsor may reinstate previously forfeited amounts using available forfeitures.
Forfeitures from 401k retirement plans can be utilized in a variety of ways. It is important to have a sound fiduciary process in place for utilizing the retirement plan forfeitures.
The plan sponsor serving as the primary fiduciary should act in the best interests of the retirement plan participants and their beneficiaries when implementing a strategy for forfeitures as they should for all of their responsibilities.
Derek Fiorenza is COO and CCO with Summit Group Retirement Planners, Inc. Summit Group Retirement Planners, Inc. specializes on collaborating with employers on the design, installation, and ongoing servicing needs of their retirement programs. For further information, please contact a Summit Group Retirement Planners representative at 267-433-1050 or dfiorenza@sgretirementplanners.com.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
