What can you do with forfeited retirement plan funds? Here’s what IRS says

You can’t just sit on forfeited retirement plan funds. But what options do you have? IRS has proposed regulations that’ll provide clarity for employers.

It’s a common situation: A business makes employer contributions to a retirement plan it sponsors, but employees leave before they’re fully vested.

When it comes to salary reductions Payroll makes each pay period, that money goes into participants’ retirement plan accounts, staying with them even if they quit right away.

IRS has different rules, though, for how employers should handle the contributions they’ve made to retirement plans.

Here’s what IRS said.

Employer contributions to retirement plan

According to the proposed regulations, a plan could specify that it’ll take one or more of the following steps to deal with defined contribution plan forfeitures:

• pay plan administrative expenses
• reduce employer contributions under the plan, or
• increase benefits in other participants’ accounts according to plan terms.

So, how long do plan administrators have to use or allocate defined contribution plan forfeitures? The deadline is 12 months from the end of the plan year. You’d determine the plan year in which the forfeiture occurred. From the close of that plan year, plan administrators would have 12 months to do something with the funds.

If finalized, the regs would take effect for plan years beginning on or after January 1, 2024.

Other changes

This proposed regulatory change comes at the same time as some legislative changes affecting retirement plans.

The Secure 2.0 Act recently became law. For example, one provision of that law takes effect after December 31, 2024. The measure establishes that automatic enrollment in 401(k) and 403(b) plans is mandatory. Employees will be able to opt out of coverage.

A participating employee’s contribution amount must be at least 3% and not more than 10% initially. That amount escalates by 1% each year until reaching 10%, with a maximum of 15%, according to Section 101 of the Secure 2.0 Act.