ERISA is filled with traps for the unwary. Some are complex, hiding in layers of regulatory nuance. Others are deceptively simple—like plan forfeitures. Yes, I’m talking about those dollars left behind when participants fail to vest in employer contributions. Easy to ignore. Easy to mishandle. And now, thanks to the IRS, impossible to overlook without consequence.
The IRS has spoken, and here’s the message in plain English: if you’re sitting on plan forfeitures from 2024 or any earlier year, you’ve got until December 31, 2025 to use them—or you’ve got a compliance failure on your hands.
Let me back up a bit. In 2023, the IRS issued proposed regulations aimed at cleaning up the widespread misuse—or nonuse—of forfeitures in defined contribution plans. The rule? Forfeitures must be used no later than 12 months after the end of the plan year in which they’re incurred. That’s not a suggestion. That’s an expectation. Miss the deadline, and you’ve got a formal compliance issue.
Now here’s the good news. Recognizing that many plan sponsors haven’t been following the rule—some because they didn’t know better, others because they just didn’t know at all—the IRS is offering a one-time reprieve. Under the proposed regulations, any forfeitures incurred during plan years beginning before January 1, 2024, are treated as if they were incurred in the first plan year starting on or after that date. Translation: if you’re on a calendar-year plan, all of those pre-2024 and 2024 forfeitures must be put to use by December 31, 2025.
Let’s be clear—this isn’t a “we’ll look the other way if you try your best” situation. It’s a window. A deadline. And if you fail to act, it slams shut, and you’ll be left facing a compliance failure with no easy way out.
Of course, utilizing forfeitures isn’t as simple as dumping them back into the plan. The use must be consistent with the terms of your plan document. Are forfeitures allocated to participants? Used to reduce employer contributions? Cover plan expenses? Your plan document holds the answer—and you’d better be following it. If you’re not, you’re risking not just IRS scrutiny, but participant lawsuits, which we’ve already seen cropping up across the country.
Now, a common question: “But Ary, these are just proposed regulations—do I really have to follow them?” My answer? Yes. The IRS has made it crystal clear: you can rely on these proposed regs now. There’s no need to wait until they’re final to get your house in order. And if you’re sitting on unused forfeitures, there’s no excuse not to act.
So here’s your action plan:
1. Inventory your forfeitures. Figure out what you’ve been carrying forward—and for how long.
2. Check your plan document. Make sure you know what the governing rules are for using forfeitures.
3. Develop a plan. Use the forfeitures in a compliant way before December 31, 2025.
4. Document everything. If the IRS or a plaintiff’s lawyer comes knocking, you’ll want a clear paper trail.
Retirement plan compliance isn’t just about keeping the IRS happy—it’s about doing right by your participants. Forfeitures aren’t “extra” money. They belong to the plan, and they must be used for the benefit of participants, according to the rules you agreed to when you adopted the plan.
The clock is ticking. The relief is temporary. Do the right thing now—before the IRS does it for you.
