A forfeiture is the non-vested portion of an employee's account that they leave behind when taking a plan distribution, such as after separation of employment. Those leftover account balances are moved to the plan’s forfeiture account. Forfeiture account funds may be used to offset the cost of Vestwell’s services or other plan expenses.
Forfeited amounts must generally be used for one of the following four purposes:
- Pay allowable plan expenses, such as plan amendments or recordkeeping fees
- Be used towards employer matching or profit-sharing contributions
- Allocate to eligible participants as additional company contributions
- Restore a previously forfeited account balance
Your plan document may limit these choices, but most plans allow all or some combination of these options. Some plan documents get even more granular and give the option to limit it so that match forfeiture can only be used to offset/allocate as a match. In contrast, profit-sharing forfeitures can only be used to offset or allocate as additional profit sharing.
Timing is important. Most plans require forfeitures to be used no later than the last day of the year after the forfeiture occurs. According to the legal plan document, failure to utilize the forfeiture account is an operational failure. It’s also the kind of oversight that is getting increasing attention from the Internal Revenue Service because an unused forfeiture precludes participants from being provided with additional benefits or reduced plan expenses. A forfeiture can usually be self-corrected if completed within two years of when the forfeiture account should have been used.
A forfeiture account is different than a suspense account. Suspense accounts arise when there is an accidental overfunding of company matching profit-sharing contributions or pre-funding company contributions throughout the year, even though they won’t be allocated to employee accounts after the end of the year. Suspended amounts must be allocated to employees as contributions, and they must generally be allocated no later than the last day of the plan year in which they are deposited.
Unfortunately, using a forfeiture account might not be as simple as applying the balance to pay recordkeeping fees. If the plan document requires at least part of the forfeiture to be allocated to employees, the benefit owed to each employee needs to be calculated and applied properly. The decision to pay expenses from plan assets is a fiduciary one, and the employer should confirm that the expense is related to a plan fiduciary matter (as opposed to a corporate matter) and that the cost is reasonable. Many employers also want to use the forfeiture account to offset any employer match, which may also be feasible depending on your plan features.
Your Vestwell invoice will include a running balance of your forfeiture account.
Please contact your Vestwell Client Success Manager for assistance on this matter at clientsuccess@vestwell.com.