IRS Proposes General Forfeiture Rules for Qualified Plans

On February 27, 2023, the IRS published a proposed rule in the federal register relating to the use of forfeitures in qualified retirement plans, including a deadline for the use of forfeitures in defined contribution plans. Previous guidance and regulations prohibited plan administrators from applying forfeitures arising from severance of employment, death, or for any other reason to increase the benefits any employee would otherwise receive under the plan. Previous regulations also required plan administrators to use those forfeited amounts as soon as possible to reduce the employer's contributions under the plan. However, the agency determined that subsequent regulation that established minimum funding requirements for defined benefits plans made the requirement to use the forfeitures “as soon as possible” infeasible.

Under the proposed rule, plan administrators can use forfeitures in the following ways to:

1. Pay plan administrative expenses;
2. Reduce employer contributions under the plan; or
3. Increase benefits in other participants' accounts in accordance with plan terms.

Note that the proposed rule does not prohibit a plan document from specifying only one use for forfeitures, but the plan may fail operationally if forfeitures in a given year exceed the amount that may be used for that one purpose.

The proposed rule also requires that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.

The proposed regulations will apply for plan years beginning on or after January 1, 2024. Thus, for example, the deadline for the use of defined contribution plan forfeitures incurred in a plan year beginning during 2024 will be 12 months after the end of that plan year. Taxpayers, however, may rely on these proposed regulations for periods preceding the applicability date.

The agency asks for comments within 90 days from February 27, 2023. The agency specifically asks for comments concerning:

• Whether the rules for the use of forfeitures in defined benefit and defined contribution plans can be further simplified to reduce administrative costs and burdens; and
• Whether any issues arise concerning other unallocated amounts (in addition to forfeitures) with respect to qualified retirement plans, and if issues do arise, whether guidance should be provided addressing those issues.

Retirement plan sponsors should be aware of this proposed rule and monitor developments.

Federal Register: Use of Forfeitures in Qualified Retirement Plans »