A common plan mistake that I see is plan sponsors not monitoring forfeiture accounts. Forfeiture accounts occur when monies are set aside to match employee contributions to retirement plans, but the employee terminates prior to fully vesting. The ‘forfeited’ money is supposed to be distributed within the terms of the plan. Generally, the balance held in the forfeiture account should be fully allocated at least once a year. Therefore, the balance of forfeiture accounts should be ‘zero’ at least sometime during the year. The IRS states those forfeitures may be used to:
– Pay for a plan’s administrative expenses and/or
– Reduce employer contributions
Here’s what you can to do make certain that your company is in compliance:
– Put a provision in the plan document to detail the handling of forfeited monies.
– Monitor forfeiture suspense accounts to be sure that monies are not carried into a subsequent plan year.
If you have already made the error, it’s possible to self-correct the mistake without penalty within a two-year period. See the Employee Plans Compliance Resolution System (EPCRS) for information about a Self-Correction Program and Voluntary Correction Program.