- May 14, 2025
According to the Internal Revenue Service (“IRS”), forfeitures in a defined contribution plan must be used no later than 12 months after the end of the plan year in which the forfeitures are incurred. The IRS considers any failure to abide by this timeline to be a compliance failure. Unfortunately, many plan sponsors inadvertently fail to honor this timing obligation and, as a result, their plans have compliance issues that should be addressed. While many plan sponsors have run afoul of this rule, the IRS is currently offering a temporary reprieve for plan sponsors affected by these failures if they act now to resolve the matter.
In 2023, the IRS released proposed regulations regarding forfeitures that included relief in connection with this issue. More specifically, under the rules contained within the regulations, 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. Consequently, any forfeitures attributable to 2024 or, more importantly, any years prior to 2024 must be used by no later than 12 months after the end of the 2024 plan year in order to avoid a compliance failure. With respect to a defined contribution plan that employs a calendar year plan year, this means that all forfeitures from 2024 or earlier must be utilized by December 31, 2025 to avoid compliance issues.
Although beyond the scope of this article, numerous participant lawsuits have been filed regarding the proper utilization of forfeitures. In this regard, it is important to ensure that the terms of the retirement plan document governing the proper use of forfeitures are followed when pursuing the relief described above.
The regulations granting the forfeiture relief described above remain in proposed form. However, the IRS clearly stated that the regulations may be relied upon by plan sponsors prior to the date that they are finalized. Therefore, plan sponsors can confidently follow the guidance included within the proposed forfeiture regulations in order to ensure they are compliant in how they handle plan forfeitures.
We hope that this article helped you to better understand these topics and encourages plan sponsors to comply with these rules. However, please be advised that this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. Further, it considers proposed rules which are subject to change before being issued in final form by the IRS at a later date. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.