What are Forfeitures?
According to 401(k) tax rules, the concept of forfeitures applies to employer contributions that a participant becomes ineligible to receive due to a break in service or some other plan rule that does not allow the participant to share in employer contributions. For example, if an employer contributes a 401(k) match and an employee is terminated, the unvested amount of the match post-termination is routed to the company’s forfeitures account. An employer can then use accrued forfeitures to reduce or offset future employer contributions.
Here are a few key items to keep in mind:
- forfeitures only apply to employer contributions subject to a vesting schedule (in other words, if your plan provides 100% immediate vesting of employer contributions forfeitures may not be available);
- only unvested employer contributions are considered forfeitures (which highlights the importance of maintaining accurate employment service records); and
- employee contributions may never be “forfeited” and available for use by the employer (e.g., account balances of missing or non-responsive participants are not eligible for any forfeiture process that allows use or diversion of those funds for any purpose).
Justworks enables customers who offer 401(k) matching (or other employer)contributions to use accrued forfeitures as a credit toward employer contribution obligations. As of June 2022, if a company has funds in their forfeiture account, Justworks is streamlining the process for employers to use these funds by issuing credits for employer contributions and any applicable employer paid plan administration fees funded throughout the year. These credits will be applied to the first invoice of each month. Credits will be displayed as “Forfeitures Credits” on each invoice where credits have been applied.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.