IRS proposed retirement plan rule: Sets deadline for using 401(k) plan forfeitures

Proposed updated IRS rules governing forfeiture in retirement plans would codify several policies already in place, but not found in federal regulations, retirement advocates said late last month.

But they added that a final rule should provide more flexibility—particularly for larger employers.

Addressing defined contribution plans, the proposed rule states that any forfeitures may be used to pay plan administrative expenses, to reduce employer contributions under the plan and to increase benefits in other participants’ accounts.

The proposal would generally require that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.

“This deadline is intended to simplify administration by providing a single deadline for the use of forfeitures that applies for all types of defined contribution plans and to alleviate administrative burdens that may arise in using or allocating forfeitures if forfeitures are incurred late in a plan year,” the IRS said.

“ERIC appreciates the work the IRS has done to establish clear guidelines regarding forfeitures to help efficient plan administration and generally supports the new rulemaking,” Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee said, as the committee submitted comments on the proposal. “The proposal would be strengthened with additional implementation flexibility and guidance reflecting the unique challenges large employers face in addressing the benefits of missing and unresponsive participants.”

The proposal largely codifies existing policies, according to the committee.

It would update forfeiture rules for defined benefit plans by tying them to minimum funding rules. It states that forfeited defined benefit accounts may not be used to offset employer contributions. The forfeitures are treated as increasing or decreasing a plan’s minimum funding requirements for future years.

Comments on the rule were due in the Federal Register May 30.

In a letter to the IRS, Banducci said that the timeline established in the proposal should be extended. The proposed rule would be effective as of the first day of the plan year beginning after Jan. 1, 2024.

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“ERIC appreciates the built-in transition time; however, more flexibility would be helpful,” he wrote. “It is possible that this proposal will not be finalized for several months after the close of the comment period, perhaps even late in 2023.”

He asked the IRS to consider providing “additional transition relief.”

Banducci said that ERIC supports the proposed regulation’s provisions governing defined benefit plans, which he said updates 60-year-old guidance.

In commenting on the proposed rule, the American Retirement Association said it supports the IRS’s effort to formalize prior guidance by codifying it.

“The timely and efficient use of forfeitures has been a challenge for plan sponsors, and particularly difficult for small businesses that may not employ dedicated benefits personnel,” the association said. “The ability of plan sponsors to have straightforward and practical guidance on the use of forfeitures will greatly simplify plan administration.”

The association recommended that certain timelines be clarified in any final rule.

In its comment letter, the American Benefits Council said that if the rule is finalized, plan sponsor and service provider members generally will be able to implement it without disruption.

However, the council recommended additional relief be provided for certain unused forfeitures, clarification be provided for the treatment of plan amendments related to the final rule and additional relief be given for any defined plan forfeitures incurred during any plan year that begins before Jan. 1, 2024.

The council also said that if forfeitures in any year are more than required for administrative expenses or existing required employer contributions, the proposal effectively would require additional benefits.

“While that may be a noble public policy goal, and many employers will be comfortable providing additional benefits, there is nothing in the Code that imposes such a requirement,” the council added.