New IRS Rules On 401(k) Forfeitures
If you have a company-sponsored 401(k) plan, look out: New rules outline what you can and can’t do with “forfeited” contributions.
In case you need a refresher, here’s what a “forfeiture” is in this context: When an employee leaves your company and has a 401(k) account eligible for employer contributions, some of the employer account balance might not be vested.
In those cases, the employee gives those funds up (hence the “forfeit” language). Today, we’ll outline the IRS’s new rules on 401(k) forfeitures so you can keep your company out of trouble with retirement plans.
Timelines to Follow For the New 401(k) Forfeitures
Adhere to the new rules and timelines—the first of which has already passed! Dates to know:
For Forfeitures From 2024 And Earlier
Amounts must be used by December 31, 2025.
For Forfeitures From 2025 And Later
Amounts must be used within 12 months. So, for example:
- 2025 funds should be used by December 31, 2026
- 2026 funds should be used by December 31, 2027.
- 2027 funds should be used by December 31, 2028.
Until further notice, future timelines will follow the same pattern.
Permitted Use of Forfeitures
Under the new guidelines, you may only use the forfeited amounts in three ways:
- Use them to defray future employee contributions.
- Use them to defray allowables expenses over the last 12 months.
- Reallocate them to employees.
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