When we talk about 401(k)-type retirement plans we sometimes focus on the contributions made by employees that are always immediately vested. In other words, it’s their money and they can always withdraw it without forfeiting any - subject to IRS rules about early withdrawals.
We know, of course, that employers often make profit sharing or matching contributions, too. These contributions may be subject to a vesting schedule. Vesting over a period of years provides an incentive for employees to stay and provides the company flexibility in how they choose to share the wealth.
When an employee leaves before being fully vested, the non-vested portion of their account is forfeited back to the plan. Generally, an employer has three options about how to use forfeited monies:
- They can redistribute the forfeited amount to the remaining eligible participants.
- Or they can apply the forfeited money to plan expenses. This reduces the net expense of maintaining the plan.
- Or the forfeited amount can be returned to the employer.
The company’s retirement plan document spells out how forfeitures are to be treated. In other words, the definition of vesting and forfeitures and how they’ll be handled should be clear to the employer and all plan participants.
As a plan design feature, vesting and forfeiture rules associated with employer contributions can be an important tool to help an employer offer a potentially lucrative employee benefit while maintaining control of how these dollars are ultimately distributed. Like many of our previous topics, this is another example of understanding your client’s objectives and designing a retirement plan that fits their particular needs and goals.
If you have any questions about forfeitures, don’t hesitate to reach out to chat. We’re here to support you.