What are the Deadlines for Spending Plan Forfeitures?

Q: I work for a large health care organization that sponsors an ERISA 403(b) plan. We have a rather large unused forfeiture account, with forfeitures that date back a number of years. Our recordkeeper recently informed us that we have to use up all the forfeitures in the account by December 31, 2025. Is this correct?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer 

A: Your recordkeeper’s assertion is based on proposed regulations issued in 2023, which state that plan sponsors must use forfeitures by the end of the plan year after the plan year in which they were incurred. As many plan sponsors such as yourself have unused forfeitures dating back several years, the IRS included a transition rule that deemed all pre-2024 plan year forfeitures to have been incurred in the 2024 plan year, basically allowing plans with several years of forfeitures accrued to use all such forfeitures by the end of the 2025 plan year.

However, the IRS has not yet finalized the proposed regulations. Should you choose to rely on the proposed regulations, all of your forfeitures that accrued in 2024 and prior years will need to be used up by the end of 2025 (assuming you utilize a calendar plan year).

However, your recordkeeper is slightly incorrect in stating that ALL forfeitures in your account must be used by the end of 2025: Forfeitures accrued in the 2025 plan year would, under the proposed regulations, need to be utilized by the end of the 2026 plan year.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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