We live in a society that has a transient workforce. According to the Bureau of Labor Statistics, the average person will have 10 different jobs before reaching the age of 40. What this means in the world of retirement plans is that plan sponsors need to be prepared for the impact that employee turnover has on the administration and operation of their retirement plans. In this regard, every retirement plan sponsor should have a written procedure detailing how to deal with an employee’s termination of employment. However, for purposes of this article, we are going to focus only on one aspect of the employment termination process as it relates to defined contribution retirement plans (“Plans”). More specifically, this article examines the involuntary cash-out provisions included within most Plans.

As we approach the end of the calendar year, it is important to be reminded about one frequently overlooked retirement plan requirement. Upon attainment of age 70-1/2, certain participants of a tax-qualified retirement plan may be required by federal tax law to withdraw a minimum amount from such plan each year. These mandatory distributions are known as “required minimum distributions” (“RMD(s)”).

Many tax-qualified, defined contribution retirement plans have provisions that allow the sponsor of such plan to fund profit sharing or, in the case of a 401(k) plan, matching contributions for the benefit of its participants. As a condition of receiving these employer contributions, many sponsors also impose a vesting schedule on such amounts. This has the effect of permissibly forcing a participant to work for some minimum period of time before he or she has a full and non-forfeitable right to such amounts. If a participant fails to satisfy this minimum period of employment, he or she may forfeit some or all of his or her employer funded benefit. When “forfeitures” occur, they are then generally available to the sponsor for the purpose of funding additional employer contributions to the participants of such plan or paying certain plan related administrative expenses. The remainder of this article discusses a newly proposed Internal Revenue Service (“IRS”) rule that brings a welcome expansion to the permissible uses of forfeitures to fund employer contributions.