On February 27, 2023, the IRS published new proposed regulations governing the timing and use of forfeitures in qualified plans (both defined contribution plans and defined benefit plans) to be effective starting in 2024. See: https://www.federalregister.gov/documents/2023/02/27/2023-03778/use-of-forfeitures-in-qualified-retirement-plans.
Defined Contribution Plans
The proposed regulations would clarify that forfeitures arising in any defined contribution plan may only be used for one or more of the following purposes, as specified in the plan document: (1) to pay plan administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants' accounts in accordance with plan terms. In this guidance, the IRS clarified that the use of forfeitures to reduce employer contributions includes the restoration of inadvertent benefit overpayments and the restoration of conditionally forfeited participant accounts that might otherwise require additional employer contributions). Under the proposed regulations, plans must generally use/allocate forfeitures no later than 12 months after the close of the plan year in which the forfeitures are created. The IRS emphasizes that in all cases plan operations must follow the plan document.
The proposed regulations include a limited transition period to allow defined contribution plans to come into compliance. Under the transition rule, forfeitures incurred during any plan year that begins before January 1, 2024, are treated as having been incurred in the first plan year that begins on or after January 1, 2024; accordingly, those forfeitures must be used no later than 12 months after the end of that plan year.
Defined Benefit Plans
For defined benefit plans, reasonable actuarial assumptions must be used to determine the effect of expected forfeitures on the present value of plan liabilities under the plan's funding method. Differences between actual forfeitures and expected forfeitures will increase or decrease the plan's minimum funding requirement for future years pursuant to the plan's funding method.
Next Steps
Plan administrators will want to review their plan documents and recent valuations to determine how forfeitures are to be used/allocated under their document and how they have been treated in operation and make a plan to bring the plan into compliance if needed. If correction is needed, plans may take advantage of the Employee Plans Compliance Resolution System (“EPCRS”), as amended by the Secure 2.0 Act. Please join us for a webinar on this topic Secure 2.0 Corrections - EPCRS/Overpayments on April 27, 2023 from 11:00am - 12:00 pm PT. Register here.