Forfeiture Accounts May Help Pay for Plan Expenses

A forfeiture is the non-vested portion of a participant’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. Did you know that a forfeiture account balance may be able 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 for plan amendments or recordkeeping fees;  
  • Be used towards the employer match or profit-sharing contributions;
  • Allocate to eligible participants as additional company contributions; and/or
  • Restore a previously forfeited account balance. 

Your plan document might 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 forfeitures 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 timely 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 or profit-sharing contributions or pre-funding company contributions throughout the year, even though they won’t be allocated to participant accounts after the end of the year.  Suspended amounts must be allocated to participants 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 participants, the benefit owed to each participant needs to be calculated and applied properly. The decision to pay expenses from plan assets is a fiduciary one, and the plan sponsor should confirm that the expense is related to a plan fiduciary matter (as opposed to a corporate matter) and the cost is reasonable. Many sponsors 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 if you wish to use it for your plan.  clientsuccess@vestwell.com