What is a 401k forfeiture?

401k forfeitures occur when profit sharing (or matching contributions) are made by the employer, and the participant leaves before they’re 100% vested. Those chunks of money (which were designated to the terminated participant) are forfeited.

Once those monies are forfeited, they must be handled carefully. If not, you risk 401k plan disqualification.

 

What Can You Do With 401k Forfeitures?

401k forfeitures must be allocated properly

Mishandling your participant forfeitures may cause your 401k plan to be disqualified

Here’s a quick post from benefits law advisor. Essentially, forfeitures can be used to:

 

  • Pay plan expenses
  • Offset future matching and non-elective contributions (NOT including safe harbor contributions)
  • Reallocate to participant accounts

 

The important part is no matter which option you choose, it must be handled timely. As a sponsor, you cannot sit on these funds for more than a year.

Holding forfeitures for more than a year can result in disqualification of your 401k plan. How you handle forfeitures is on the IRS and DOL’s list of review items when they audit your plan.

Forfeitures will happen, it’s part of running a plan and a business. Just make sure you’re properly accounting for them and handling them expediently.