Please feel free to launch the video review of this month’s topic or read more below!

The IRS recently sent out a reminder to spend your forfeitures soon.

What are forfeitures?

Forfeitures are employer contributions that are left in a plan when a participant terminates before becoming fully vested.

Example:  You may have a 50% matching contribution on employee deferrals.  If you have a 2-year cliff vesting schedule and the employee leaves before completing two years of service the employer contribution is forfeited by the employee and kept in the plan.

Typically those funds are placed into a suspense account, also known as a forfeiture account, and the IRS does not allow you to accumulate those dollars.  You have to spend them.

When must forfeitures be used?

Forfeitures must be used or allocated in the plan year incurred.  The Code does not allow you to carry forfeitures into a subsequent plan year.

If you have forfeitures from the last two plan years in your plan you can correct the mistake by using the Employee Plans Compliance Resolution System (EPCRS), which is a Self-Correction Program.  If the forfeitures were deposited in prior plan years you should seek legal counsel.

What can you spend forfeitures on?

Well that depends on your plan document.  Your plan terms will dictate how you can spend those dollars.  Typically, they are used to offset employer contributions or pay for administrative expenses.

Example for Employer Contribution:

Next payroll, instead of sending the full match owed, send only the difference between what is owed and the balance in the forfeiture account with directions to your service provider to use the monies in the forfeiture account.

Example for Administrative Expenses:

Submit your bills for auditing or investment consulting to your service provider to be paid from the forfeitures account.

Steps to take now:

1.       Check your last trust statement or call your service provider to see if you have forfeiture monies in the plan

2.       Check the terms of your plan document on how to use or allocate the monies (You can allocate the monies across current participants but be careful that the calculation is non-discriminatory and seek counsel.)

The IRS has more information available on their website.  Please click HERE to launch the page.

On a different note, I am proud to announce that I was awarded the Tax-Exempt and Governmental Plan Consultant designation from ASPPA last month and happen to be the only designee in the state of Colorado.  So if you happen to know of a tax-exempt or governmental organization in need of an investment consultant, please pass my contact information on to them.

As always, please feel free to contact me with any questions.

Best Regards,

Michele L. Suriano QPFC, TGPC, AIF®