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Forfeitures: Whose Money Is It?

June 23, 2017

Wondering what happens to a terminated employee’s retirement savings? They become “forfeitures”—read on for what employers can and cannot do with these funds.

You’re a great employer and provide your employees an avenue to save for their retirement through a qualified retirement plan. On top of that, you provide an employer contribution to assist in your employees savings. But what happens when an employee is terminated? Where does that money go and what is your fiduciary responsibility over that money?

What are forfeitures?

When an employee is terminated before they have become fully vested in their employer contributions through a qualified retirement plan, they forfeit a portion of those contributions. Those contributions are transferred from the participant’s account to a separate forfeiture account within the plan.

What can you do with forfeitures?

  • Pay plan expenses;
  • Allocate them to plan participants;
  • Reduce employer contributions to the plan;

What can’t you do with forfeitures?

  • Withdraw the funds from the plan for other uses;

Now that you know what forfeitures are and what you can and can’t do with them, what’s next? It is important to ensure your plan document clearly outlines how forfeitures will be used and that those guidelines are followed. It is the plan sponsors fiduciary responsibility to ensure the plan is in compliance, and if non-compliance is identified, to timely correct the failure.

How to correct a failure?

The IRS allows for both a Self-Correction and Voluntary Correction Program to correct an identified failure. The Self-Correction Program allows the plan sponsor to correct the error without notifying the IRS, if the failure is insignificant. If the failure is significant, the Voluntary Correction Program must be used and requires the plan sponsor to notify the IRS of the failure.

Determining if a failure is significant

That depends on (but is not limited to),

  • The number of participants affected;
  • Reason for the failure and;
  • Timeliness of correction.

For further guidance, please do not hesitate to contact me or any of our Employee Benefit Plan Specialists.

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