3873 / What are the rules with respect to permitted forfeitures provided by the vesting requirements applicable to qualified plans?

Editor’s Note: The IRS has released new proposed regulations to clarify the permitted uses of forfeitures in defined contribution plans.  Under the new proposed regulations, defined contribution plans will be entitled to use plan forfeitures to (1) pay the plan’s administrative expenses, (2) reduce employer contributions under the plan, or (3) increase benefits for other participants if the plan terms permit this action.  Plans will be required to use all forfeitures no later than 12 months after the end of the plan year in which the forfeiture occurred.  A transition rule applies so that a forfeiture incurred during a plan year beginning before January 1, 2024 will be treated as having occurred in the first plan year that begins on or after January 1, 2024.  Plans should review their documents to ensure that one or more of these permitted uses of forfeitures is permitted in the written plan documents.

The vesting rules do not require a plan to provide a preretirement death benefit aside from the employee’s accrued benefit derived from his or her own contributions. The IRC provides that, “A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that it is not payable if the participant dies,” except as required by the survivor annuity provisions ( Q 3882).¹

A reversion to the employer of contributions made under a mistake of fact or a mistake as to deductibility is not a forfeiture even if it results in adjustment of an entirely or partially nonforfeitable account, provided the return is limited to an amount that does not reduce a participant’s balance below what it would have been had the mistaken amount not been
contributed.²

Without violating the nonforfeitability rules, a plan may provide that payment of benefits to a retired employee is suspended for any period during which the retired employee resumes active employment with the employer who maintains the plan or, in the case of a multiemployer plan, in the same industry, the same trade or craft, and the same geographic area covered by the plan as when his or her benefits commenced.³ The provision must be carefully drafted and administered to comply with applicable regulations and rulings.⁴