Understanding How Forfeitures Work in Your Retirement Plan

In 401(k) plans, employee contributions are always fully vested, meaning employees can withdraw these contributions, subject to IRS rules. However, employer contributions like profit-sharing or matching may be subject to a vesting schedule, encouraging employee retention.

Forfeiture Options

When an employee leaves before being fully vested, the non-vested portion of their account returns to the plan. Here are three common ways to use forfeited funds:

1. Redistribute: Share forfeitures with remaining eligible participants.
2. Apply to Plan Expenses: Use forfeitures to cover plan expenses, reducing out-of-pocket costs.
3. Offset Contributions: Apply forfeited funds to reduce future employer contributions.

Plan Document Specifications

Your retirement plan document outlines how forfeitures are managed, ensuring transparency for all employees. Properly structured vesting and forfeiture provisions make the plan an effective employee benefit while giving employers control over fund allocation.

For questions about vesting or forfeiture policies in your plan, feel free to reach out. We’re here to assist you!