Compliance News | February 28, 2023
On February 24, 2023, the Treasury Department issued a proposed rule that would govern the treatment of forfeitures in DB and DC retirement plans.
The rule would update the forfeiture rules for DB plans to tie them to the minimum funding rules. It would also clarify that DC forfeitures must be allocated no later than 12 months after the close of the plan year in which the forfeiture occurred.
Treasury welcomes comments on the proposed rule, which plans may rely on before it takes effect.
The Internal Revenue Code and ERISA allow forfeiture of participant’s DC accounts and DB accruals in narrow circumstances. For example, DC plans are allowed to forfeit an unvested participant’s benefits on separation provided the participant’s account is restored if the participant returns within a specified period. Plans may use these forfeitures to reduce employer contributions and to pay administrative expenses.
The issue of use of forfeitures has received considerable attention in recent years because of the IRS’s and DOL’s focus on how plans handle missing participants and the benefits to which they are entitled.
The proposed rule addresses DB and DC plans separately:
The proposal would provide a transition rule for DC plans. Under this rule, forfeitures incurred during any plan year that began or begins before January 1, 2024 are treated as having been incurred in the first plan year that begins on or after January 1, 2024. As a result, a plan would have 12 months from the end of the 2024 plan year to eliminate the forfeitures.
The rule is proposed to apply for plan years beginning on or after January 1, 2024. However, plans may rely on these proposed regulations for the period preceding the applicability date.
Treasury asks for comments on:
Comments are due by May 30, 2023.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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