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 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); Unvested employer contributions also include Discretionary, Safe Harbor and Safe Harbor Non-Elective matches that were scheduled to be deposited into an employee’s 401k account but were reversed, canceled, and/or an employee was ineligible to receive.
- employee contributions are always fully vested, and 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 future employer contribution obligations. 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.
Related Entities & Controlled Groups
If a company is part of a controlled group, there are a few things to consider:
- Under the Justworks Retirement Savings Plan, all related entities under the same plan have equal claim for the forfeitures of their plan (regardless of which entities contributed more or less to the forfeitures account)
- As a result, admins may see some related entities receive a higher amount in forfeiture credits in relation to the Employer Match amount, while others may receive less.
- This is only applicable when the total amount of the forfeiture balance is not sufficient to cover the total sum of employer contributions across all related entities in the same controlled group and plan.
Let’s take a look at an example:
There are 3 related entities (Company X, Y, and Z) with employer matches of $10, $10, and $20 respectively (total $40), and their Slavic401k forfeiture account has a balance of $15.
- In this case, $15 is not enough to cover the sum of $40, therefore the entire forfeiture account balance will be divided evenly among the entities and applied to offset each employer match. The company will be responsible for any amount remaining after the credit is applied.
- $15 will be divided evenly into 3 separate forfeiture credits of $5, and applied equally to the 3 related entities.
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.