Handling Forfeitures Under A 401(k) Plan

Forfeitures represent the non-vested portion of a participant's Retirement Plan account balance that is forfeited by the participant. Forfeitures can generally be used for the following plan purposes:

• To restore rehired participant's forfeitures
• To pay the employer's contribution under the plan
• To pay plan expenses
• To be added to the employer's contributions to the plan
• To satisfy failed non-discriminations tests

Example: Roberta terminates her employment with the LMNOP Group. When she terminates, she has $17,000 in her employer contribution account in which she is 40% vested. She will forfeit 60% of the $17,000 or $10,200. The $10,200 will used as provided in the plan document. For an HR Generalist, managing these calculations is a key part of human resources compliance.

Non-vested amounts must be forfeited no later than the end of the plan year during which the former participant incurs a five-year break in service. Generally, to avoid the administrative complexity of holding this money for over five years after the participant terminates, a complete distribution of the participant's vested interest generally triggers the forfeiture. Participants with no vested account balances are generally considered to have received a distribution as of their date of termination (thus, nothing needs to be restored if a participant is rehired). If a participant is rehired prior to his or her five-year break in service and has received a distribution of his or her vested account balance, the participant can buy back their non-vested portion by re-depositing the amount distributed within five years of rehire. The funds used to restore these repayments can come from unallocated forfeitures, trust gains, or employer contributions under labor law and IRS guidelines.

Example: Bruce terminates employment on September 15, 2017 and on November 1, 2017 he receives a distribution of his vested account balance. For the 2017 plan year Bruce has completed 900 hours of service. This means that Bruce does not have a break in service in 2017. Bruce is rehired on March 15, 2019. He has two consecutive one-year breaks in service (for the 2018 and 2019 plan years). If Bruce repays the amount distributed to him by March 15, 2023, his forfeited non-vested account balance will be restored.

It is also important to note that whether or not a participant repays his or her vested account balance has no impact on whether or not the vesting service prior to the severance from employment is considered. In no event may forfeitures be returned to the employer or held in a suspense account. All account activity must adhere to FLSA wage standards where applicable and maintain HIPAA privacy standards for participant data. Note: This is an excerpt from our 401(k) Training & Certification Program.