Forfeitures in 403(b) and DC in general

[Belgarath]

Lots of documents have provisions that forfeitures will be used in the plan year following the year in which the forfeiture occurs. This seems particularly common in plans where forfeitures reduce. This seems eminently reasonable, as a forfeiture might not occur until late in the plan year, when matching contributions, for example, have already been funded.

Back in 2010, the IRS published in Volume 7 of their employee plan news, a blurb about forfeitures, and basically stated that they must be used in the year they occur. In spite of this, I think they have no problem with a plan provision that requires use by the end of the FOLLOWING plan year if it reduces. I think their concern was basically forfeiture "suspense" accounts that weren't being used promptly, or were being used in a discretionary fashion.

Anyway, some of the new pre-approved plans state that the forfeitures must be used by the end of the next year, but don't necessarily allow an option that they WILL be used in the next plan year.

Do you really see any problems with a 403(b) document, which of course isn't pre-approved, (or approved at all, for that matter) having a provision stating that forfeitures will be used in the year following the year in which the forfeiture occurs? (And the forfeitures reduce matching contributions)

[Kevin C]

Our new VS document allows forfeitures to be used to reduce contributions in the year following the year of forfeiture. The EGTRRA version had the same provision. The 403(b) document we use also allows it. I don't see a problem with having it in a plan.

[Belgarath]

Thanks Kevin.

[Peter Gulia]

Kevin C., do the documents say anything (perhaps in a general provision) that restrains an administrator's use of discretion in a way that could discriminate in favor of highly-compensated employees?

[Kevin C]

Peter,

I don't think I follow you. We use an adoption agreement format VS document. There are two choices in the AA for timing of the use of forfeitures. You either check the box that says they are used in the year of forfeiture or you check the box that says they are used in the year following the year of forfeiture. I don't see where discretion would enter into it.