Plan Termination and Forfeitures

If a 401k plan is terminating for example as of 5/31/25, all account balances are required to become 100% vested. But when do the remaining forfeitures have to be reallocated - is it as of 5/31 or can forfeitures remain after this date to pay expenses such as mailing fees, etc. It seems like they should go to participant accounts as of the termination date? Thank you!

First, confirm what the plan documents has to say about the use of forfeitures, and be aware that forfeiture provisions may scattered around in the document in sections dealing with contributions, forfeitures, allocations, expenses and plan termination.  Also pay attention forfeiture provisions where the plan may require forfeited amounts to be reinstated for terminated participants who were not fully vested.  These rules can be particularly tricky if the plan uses hours of service rules, or has been aggressive in making cash-out distributions of small balances.

A lot of Cycle 3 pre-approved plan documents have a provision that says the plan sponsor can choose what to do with the forfeitures.  Be mindful that this happens to be at the center of a lot of recent law suits against the plan sponsors.

Let's assume that the decision is made to use available forfeitures to pay for plan expenses.  Frankly, this is common.  Best practice is to make sure that the plan expenses will equal or exceed the amount of available forfeitures.  

The plan does not want to be in the position that all participants are paid out and all expenses have been paid, and there is still money left in the plan.  It can be a nightmare trying to get rid of what likely would be a small amount by reallocating it to participants who already have been paid, or by reverting funds to the employer (just don't do this).

Also keep in mind that the plan really isn't terminated until the trust assets equal zero, and Form 5500s need to be filed for each year until the year in which that happens.  If the trust persists for more than 12 months from the date of the plan was terminated, then the plan may be considered as no longer terminated.

This really is not onerous.  Read the document, fully vest current participants, check for any required restoration of accounts, decide on the use of the forfeitures, get a good estimate of the expenses, write the checks, close out the trust and file the final Form 5500.

Thank you!

Consider using a plan-termination amendment (which usually is needed for other reasons) to specify how the forfeitures account is used.

Using forfeitures to meet plan-administration expenses might help a plan pay service providers—recordkeeper, third-party administrator, trustee, custodian, lawyer, independent qualified public accountant. (Else, would participants’ accounts be charged?)

In my experience, the forfeitures balance often is much less than what is owing to service providers.