ERISA is filled with traps for the unwary. Some are complex, hiding in layers of regulatory nuance. Others are deceptively simple\u2014like plan forfeitures. Yes, I\u2019m talking about those dollars left behind when participants fail to vest in employer contributions. Easy to ignore. Easy to mishandle. And now, thanks to the IRS, impossible to overlook without consequence.<\/p>\n
The IRS has spoken, and here\u2019s the message in plain English: if you\u2019re sitting on plan forfeitures from 2024 or any earlier year, you\u2019ve got until December 31, 2025 to use them\u2014or you\u2019ve got a compliance failure on your hands.<\/p>\n
Let me back up a bit. In 2023, the IRS issued proposed regulations aimed at cleaning up the widespread misuse\u2014or nonuse\u2014of forfeitures in defined contribution plans. The rule? Forfeitures must be used no later than 12 months after the end of the plan year in which they\u2019re incurred. That\u2019s not a suggestion. That\u2019s an expectation. Miss the deadline, and you\u2019ve got a formal compliance issue.<\/p>\n
Now here\u2019s the good news. Recognizing that many plan sponsors haven\u2019t been following the rule\u2014some because they didn\u2019t know better, others because they just didn\u2019t know at all\u2014the IRS is offering a one-time reprieve. Under the proposed regulations, any forfeitures incurred during plan years beginning before January 1, 2024, are treated as if they were incurred in the first plan year starting on or after that date. Translation: if you\u2019re on a calendar-year plan, all of those pre-2024 and 2024 forfeitures must be put to use by December 31, 2025.<\/p>\n
Let\u2019s be clear\u2014this isn\u2019t a \u201cwe\u2019ll look the other way if you try your best\u201d situation. It\u2019s a window. A deadline. And if you fail to act, it slams shut, and you\u2019ll be left facing a compliance failure with no easy way out.<\/p>\n
Of course, utilizing forfeitures isn\u2019t as simple as dumping them back into the plan. The use must be consistent with the terms of your plan document. Are forfeitures allocated to participants? Used to reduce employer contributions? Cover plan expenses? Your plan document holds the answer\u2014and you\u2019d better be following it. If you\u2019re not, you\u2019re risking not just IRS scrutiny, but participant lawsuits, which we\u2019ve already seen cropping up across the country.<\/p>\n
Now, a common question: \u201cBut Ary, these are just proposed regulations\u2014do I really have to follow them?\u201d My answer? Yes. The IRS has made it crystal clear: you can rely on these proposed regs now. There\u2019s no need to wait until they\u2019re final to get your house in order. And if you\u2019re sitting on unused forfeitures, there\u2019s no excuse not to act.<\/p>\n
So here\u2019s your action plan:<\/p>\n
1. Inventory your forfeitures. Figure out what you\u2019ve been carrying forward\u2014and for how long.<\/p>\n
2. Check your plan document. Make sure you know what the governing rules are for using forfeitures.<\/p>\n
3. Develop a plan. Use the forfeitures in a compliant way before December 31, 2025.<\/p>\n
4. Document everything. If the IRS or a plaintiff\u2019s lawyer comes knocking, you\u2019ll want a clear paper trail.<\/p>\n
Retirement plan compliance isn\u2019t just about keeping the IRS happy\u2014it\u2019s about doing right by your participants. Forfeitures aren\u2019t \u201cextra\u201d money. They belong to the plan, and they must be used for the benefit of participants, according to the rules you agreed to when you adopted the plan.<\/p>\n
The clock is ticking. The relief is temporary. Do the right thing now\u2014before the IRS does it for you.<\/p>\n
<\/span><\/p>","protected":false},"excerpt":{"rendered":" ERISA is filled with traps for the unwary. Some are complex, hiding in layers of regulatory nuance. Others are deceptively simple\u2014like plan forfeitures. Yes, I\u2019m talking about those dollars left behind when participants fail to vest in employer contributions. Easy … Continue reading