Understanding how forfeitures work in retirement plans
When we talk about 401k type retirement plans we sometimes focus on the contributions made by employees that are ALWAYS immediately vested. In other words, it’s THEIR money and they can always withdraw it without forfeiting ANY- subject to IRS rules about early withdrawals.
We know, of course, that employers often make profit sharing or matching contributions, too. These contributions may be subject to a VESTING schedule. Vesting over a period of years provides an incentive for employees to stay and provides the company FLEXIBILITY in how they choose to share the wealth.
When an employee leaves before being FULLY vested, the NON-VESTED portion of their account is forfeited back to the plan. Generally, a plan has THREE options about how to use forfeited monies:
- The company can Redistribute the forfeited amount to the remaining eligible participants.
- Or they can Apply the forfeited money towards reasonable plan expenses. This reduces the employer’s out of pocket expense of maintaining the plan.
- Or The forfeited money can be used by the employer to reduce future contributions.
The company’s retirement PLAN DOCUMENT spells out how forfeitures are to be treated. In other words, the definition of vesting and forfeitures and how they’ll be handled should be clear to the employer and all plan participants.
As a plan design feature, vesting and forfeiture rules associated with employer contributions can be an important tool to help an employer offer a potentially lucrative employee benefit while maintaining control of how these dollars are ultimately distributed. Like many of our previous topics, this is another example of understanding your client’s objectives and designing a retirement plan that fits THEIR particular NEEDS and GOALS.
If you have any questions about these arrangements in retirement plans we service, don’t hesitate to reach out to chat. We’re here to support you.