On February 27, 2023, the IRS and the Department of Treasury published proposed regulations regarding the use of forfeitures in qualified retirement plans. If finalized, the proposed rule will be effective for plan years beginning on or after January 1, 2024. However, plans may rely on the proposed regulations now.
Defined Contribution Plans
In 2010, the IRS informally stated that forfeitures could not be unallocated for longer than the year in which the forfeiture occurred, or in certain situations, by the end of the following year. The proposed rule formalizes this previously issued informal guidance and gives a deadline for defined contribution plans: to avoid an operational qualification failure, forfeitures must be used within 12 months following the close of the plan year in which the forfeiture occurs.
Additionally, the proposed rule outlines the allowed uses of the forfeitures, including: to pay for plan administrative expenses; to reduce employer contributions under the plan; or to increase benefits in other participants’ accounts in accordance with plan terms.
The proposed rule includes a transition rule for forfeitures that occur during a plan year that begins before January 1, 2024. Such forfeitures will be treated as having occurred in the first plan year that begins on or after January 1, 2024. This means they will have to be used within 12 months of the end of the 2024 plan year.
Defined Benefit Plans
Currently, defined benefit plans cannot use forfeitures to increase participant benefits and must be used as soon as possible to reduce employer plan contributions. The proposed rule removes the second requirement, leaving only the rule that forfeitures may not be used to increase participant benefits.
Additionally, the proposed rule allows for forfeitures to be used as part of the plan’s minimum funding actuarial assumptions.