IRS Releases Proposed Rule on Use of Forfeitures in Qualified Retirement Plans; Comments Due May 30
Published February 24, 2023
Internal Revenue Service (IRS) has released
proposed regulations that would provide rules on the use of forfeitures
in qualified retirement plans, including a 12-month deadline for the
use of forfeitures in defined contribution plans.
Forfeitures in Defined Contribution Plans
- Purposes: Proposed regulations would clarify that forfeitures arising in any defined contribution plan (including in a money purchase pension plan) may be used for one or more of the following purposes, as specified in the plan:
- (1) to pay plan administrative expenses,
- (2) to reduce employer contributions under the plan, or
- (3) to increase benefits in other participants’ accounts in accordance with plan terms.
- Plan administrators must keep records necessary to demonstrate compliance with the qualification requirements of section 401(a), including records related to the use of forfeitures.
- Timing: The proposed regulations would generally require that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.
- Proposed transition rule: Forfeitures
incurred during any plan year that begins before January 1, 2024, are
treated as having been incurred in the first plan year that begins on or
after January 1, 2024; accordingly, those forfeitures must be used no
later than 12 months after the end of that first plan year.
Forfeitures in Defined Benefit Plans
Proposed
regulations would update rules relating to the use of forfeitures in
defined benefit plans to reflect the enactment, after the issuance of
Internal Revenue Code (IRC) section 1.401-7, of new minimum funding
requirements applicable to defined benefit plans. The requirement in
existing IRC § 1.401-7(a) that forfeitures under pension plans be used
as soon as possible to reduce employer contributions would be eliminated
because it is inconsistent with those minimum funding requirements. The
minimum funding requirements of IRC sections 412, 430, 431, and 433 do
not allow the use of forfeitures to reduce required employer
contributions to a defined benefit plan in the manner contemplated by
existing IRC § 1.401-7. Instead, reasonable actuarial assumptions are
used to determine the effect of expected forfeitures on the present
value of plan liabilities under the plan’s funding method. Differences
between actual forfeitures and expected forfeitures will increase or
decrease the plan’s minimum funding requirement for future years
pursuant to the plan’s funding method.
These regulations are proposed to apply for plan years beginning on or after January 1, 2024.
IRS requested comments on the following topics:
- Whether the rules for the use of forfeitures in defined benefit and defined contribution plans can be further simplified to reduce administrative costs and burdens?
- Whether any issues arise concerning other unallocated amounts (in addition to forfeitures) with respect to qualified retirement plans, and, if issues do arise, whether guidance should be provided addressing those issues?