Unused Forfeiture

As of January 6, 2025, the plan sponsor’s forfeiture account has a balance of $35,000, which includes $25,000 from 2023 and $10,000 from 2024.

1. Is there a deadline for the use of forfeitures?

2. Is the deadline the same for both the 2023 and 2024 balances, or does each year have a separate deadline?

3. If there is a deadline as per IRS regulations, please clarify and provide the relevant regulations.

4. If the forfeitures from 2023 are not used during the 2024 plan year and remain unused at the end of 2025, would this violate any IRS regulations or compliance requirements?

Generally they must be used by the end of the plan year in which they occur or the end of the plan year following the year in whch they occur. They must be used up each year and cannot accumulate.  The timing is specified in the legal plan document so I would check that for more information! Not using the forfeitures by the applicabl deadline is considered an operational failure. 

IRS published proposed regulations updating 1.401-7 in 2023:

https://www.federalregister.gov/documents/2023/02/27/2023-03778/use-of-forfeitures-in-qualified-retirement-plans

Quote

(b) Forfeitures under a qualified defined contribution plan. In the case of a trust forming a part of a qualified defined contribution plan (as described in section 414(i)) that provides for forfeitures, the plan must provide that:

(1) Forfeitures will be used for one or more of the following purposes:

(i) To pay plan administrative expenses;

(ii) To reduce employer contributions under the plan; or

(iii) To increase benefits in other participants' accounts in accordance with plan terms; and

(2) Forfeitures will be used no later than 12 months following the close of the plan year in which the forfeitures were incurred under plan terms.

If the plan’s governing documents do not constrain what the plan’s administration might responsibly choose:

The notice of proposed rulemaking C.B. Zeller points to includes a transition rule:

“For purposes of paragraph (b)(2) of this section [calling for forfeitures to be used no later than 12 months after the close of the plan year in which the forfeitures “were incurred”], forfeitures incurred during any plan year that begins before January 1, 2024, will be treated as having been incurred in the first plan year that begins on or after January 1, 2024.”

And: “Taxpayers . . . may rely on these proposed regulations for periods preceding the applicability date.”

If the plan TH 401k describes is on calendar plan years, the plan’s administrator might, with its lawyer’s advice, consider using the forfeitures from 2023 and 2024 during 2025.

Although the notice of proposed rulemaking states only a proposed rule, not a final or interim rule, a practitioner might suggest her client follow (at least) the proposed rule Why? The Treasury department explains that the proposed rule is based on decades-ago IRS interpretations. Until there is a Treasury rule, an IRS examiner might assume that the IRS’s interpretations are the correct interpretations of the Internal Revenue Code’s tax-qualification conditions.

As ratherbereading suggests, a plan’s administrator might read the plan’s governing documents and seek to follow them as nearly as one can.