The Department of Treasury and Internal Revenue Service have issued proposed regulations regarding the use of forfeitures in qualified retirement plans. The proposed regulations are effective for plan years beginning on or after January 1, 2024, but may be relied on immediately.
Plan sponsors should review their practices regarding forfeitures in anticipation of final regulations. However, because the proposed regulations generally mirror common practices, most plans can avoid any changes to plan documents or operations.
Defined Contribution Plans
- Use of Forfeitures. The proposed regulations provide that defined contribution plans (including money purchase plans) must use forfeitures, as specified in the plan document, to:
- Pay plan administrative expenses;
- Reduce employer plan contributions (including restoration of inadvertent benefit overpayments, restoration of conditionally forfeited participant accounts that might otherwise require additional employer contributions, and (presumably) reduction of qualified nonelective contributions or qualified matching contributions); and/or
- Increase benefits in other participants accounts.
Plans may use forfeitures for any one or more of these purposes if specified in the plan document. However, best practice would be to draft plan documents to allow forfeitures to be exhausted through all of these uses to ensure no forfeitures remain after the deadline below (which could lead to an operational failure).
- Deadline for Using Forfeitures. Under the proposed regulations, defined contribution plans must use forfeitures within 12 months of the close of the plan year in which the forfeitures arise.
- Transition rule. Any forfeitures incurred in a plan year beginning before January 1, 2024, are treated as having been incurred in the first plan year beginning on or after January 1, 2024, and must be used no later than 12 months after the end of that first plan year. This transition rule will assist plan sponsors with accumulated forfeitures - such sponsors should take immediate action to use up such forfeitures or to come up with an action plan to use them timely.
Note, the proposed regulations do not affect generally applicable deadlines related to the plan's timing of contributions and allocations.
Defined Benefit Plans – Use of Forfeitures
- The proposed regulations clarify inconsistent legal provisions by removing the requirement under Treasury Regulations §1.401-7(a) that forfeitures under defined benefit plans be used as soon as possible to reduce employer contributions. That requirement is inconsistent with the minimum funding rules under Internal Revenue Code §§412, 430, 431, and 433.
- The proposed regulations confirm that forfeitures may not be applied to increase benefits participants would otherwise receive under a defined benefit plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions.
A defined benefit plan may use reasonable actuarial assumptions in determining the effect of expected forfeitures on the plan's costs and present value of plan liabilities.
The Treasury Department and IRS have requested public comments no later than May 30, 2023, regarding the proposed regulations and, in particular, comments on the following:
- Whether the proposed rules can be streamlined to ease administrative costs and burdens; and
- Whether guidance is needed to address issues related to unallocated amounts other than forfeitures (e.g., such as those in a suspense account) in qualified retirement plans.
If you have questions regarding the proposed regulations and the impact on your plan(s) or would like to make any comments, please contact a DWT benefits attorney.