Compliance News | February 28, 2023

Treasury Proposes Rule on Retirement Plan Forfeitures

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.

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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

The proposed rule addresses DB and DC plans separately:

  • DB plans — The proposal clarifies that forfeited DB amounts may not be used to offset employer contributions. Instead, estimated forfeitures and actual forfeitures are treated under the funding rules as increasing or decreasing the plan’s minimum funding requirements for future years.
  • DC plans — The proposal makes clear that a money purchase plan, even though, like a DB plan, is a “pension plan,” is treated the same as other types of DC plans (i.e., profit-sharing and stock bonus plans) with respect to forfeitures because money purchase plans have individual accounts. DC plans will have to eliminate any forfeitures within 12 months of the last day of the plan year in which the forfeiture occurs. The forfeiture may be used to pay administrative expenses, reduce employer contributions or to increase benefits in other participant’s accounts (as specified in the plan). For example, forfeitures could be used to restore inadvertent benefit overpayments or conditionally forfeited participant accounts.

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.

Next steps

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:

  • The impact the proposed rule will have on small entities
  • Whether the proposed rule can be further simplified to reduce administrative costs and burdens
  • Whether issues arise concerning other unallocated amounts (in addition to forfeitures) and if so, if guidance is needed

Comments are due by May 30, 2023.

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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.