Key Takeaways:
- ERISA plan forfeiture accounts must be used within IRS timelines to adhere to retirement plan compliance.
- Improper forfeiture accounts used in 401(k) plans can raise fiduciary risk and potential ERISA legal exposure.
- An annual review of forfeiture account balances and plan documents can support fiduciary oversight and IRS compliance.
—
Forfeiture accounts are a normal feature of defined contribution plans, including 401(k) and 403(b) arrangements. These accounts accumulate when employees leave before becoming fully vested in employer contributions. While common, forfeiture balances that are not managed in line with regulatory requirements can present significant compliance risks.
Plan sponsors and fiduciaries must take an initiative-taking approach to managing these funds. At MGO, we have seen how proper oversight of forfeitures supports long-term plan integrity.
Understanding the Role of ERISA, IRS, and DOL
The Employee Retirement Income Security Act (ERISA), along with rules from the IRS and the Department of Labor (DOL), defines how forfeiture accounts should be treated.
Key requirements include:
- ERISA fiduciary standards mandate that all decisions about plan assets, including forfeitures, be made in the best interest of participants and beneficiaries.
- IRS regulations generally allow forfeitures to be used for:
- Paying administrative plan expenses
- Reducing future employer contributions
- Reallocating to participant accounts
Although the IRS issued proposed regulations in February 2023 to clarify forfeiture usage, these have not yet been completed. Nonetheless, fiduciaries are expected to follow current guidance and apply it by their specific plan documents.
Risks Associated With Forfeiture Account Mismanagement
Forfeiture balances must typically be used by the end of the year they arise, or no later than the end of the following year. If these timelines are not met, the plan risks losing its qualified tax status.
Beyond compliance, litigation is an increasing concern. In recent years, more than 70 lawsuits have challenged how forfeitures are used, particularly when used to offset employer contributions. These cases often raise questions about whether such use serves the interests of plan participants.
Not monitoring and use forfeiture appropriately can result in audit findings, reputational concerns, or broader regulatory scrutiny.
Best Practices for Oversight and Use
Plan fiduciaries can minimize risk by adopting a structured, transparent approach to managing forfeitures. MGO encourages plan sponsors to consider the following practices:
- Review plan documents to confirm allowable uses and required timing for forfeitures.
- Monitor account balances regularly to prevent unnecessary accumulation.
- Document fiduciary decisions and discussions about forfeiture usage during committee or board meetings.
Integrating forfeiture oversight into routine plan administration helps reduce the potential for noncompliance and improves operational consistency.
How MGO Can Help Support Retirement Plan Oversight
At MGO, our Employee Benefit Plan team helps plan sponsors to navigate the complexities of ERISA forfeiture accounts with clarity and confidence, bringing deep technical experience across IRS and DOL regulations to make sure your plan documents, administrative processes, and fiduciary decisions align with current compliance requirements.
Whether you need support reviewing forfeiture activity, strengthening internal controls, preparing for an audit, or implementing best practices across your retirement plan operations, we can assist you in reducing risk and enhancing oversight. Contact us to learn more about how we can help support your retirement plan oversight, today and as requirements continue to evolve.
Visit our Employee Benefit Plan Audit Services page to explore how MGO can support your organization. For more insights, browse the MGO Insights section or connect with our audit team to start a conversation.