The term “forfeiture” refers to the non-vested portion of a former employee’s account balance in the plan. For example, if a participant is 40% vested when he or she terminates, the remaining 60% of his or her account balance will become a forfeiture.
How Can I Use Forfeitures?
Plan Sponsors can generally use forfeitures in these ways:
Pay allowable plan expenses
Reduce employer contributions
Add to employer contributions
Most Plan Documents include language regarding forfeiture assets and often times all of these usages are available, but some make limitations. Always refer to the Plan Document to see how the plan is setup.
When Are Forfeitures Used?
Generally, they must be used by:
The end of the plan year in which they occur, or
The end of the plan year following the year in which they occur
As of January 18, 2017, the IRS issued a proposed regulation that now permits the use of forfeitures to offset all types of these contributions: