Definition
When a participant terminates before becoming fully vested, the nonvested part of the account is forfeited. The plan document controls how forfeitures are used, for instance to pay plan administrative expenses, to reduce future employer contributions, or to be allocated to participants. Forfeitures are held in the plan, often in an unallocated account, until used. In 2023 the Treasury Department and IRS proposed regulations that would require defined contribution plans to use forfeitures no later than 12 months after the close of the plan year in which they arise.
Why it matters in an audit or review
Auditors test the vesting calculation for terminated participants, confirm the forfeited amount, and verify that forfeitures were used according to the plan document. A growing unused forfeiture balance indicates a possible operational failure.
Example
Illustrative: an employee with 40% vesting leaves with a $10,000 employer match balance. The vested part is $4,000 and the forfeited part is $6,000. The plan document says forfeitures reduce the next employer match, so the sponsor's next deposit is reduced by $6,000.
Common mistakes
- Using forfeitures in a way the plan document does not allow.
- Letting forfeitures accumulate in suspense for years.
- Miscalculating vesting for rehired employees.
Sources
- IRS, proposed regulations under Treas. Reg. 1.401-7 on use of forfeitures, Federal Register, February 2023: https://www.irs.gov/retirement-plans
- IRC section 411, minimum vesting standards: https://www.law.cornell.edu/uscode/text/26/411
- AICPA, AU-C Section 703
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error