The IRS recently released proposed regulations (REG-122286-18) that would generally require defined contribution plan administrators to use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.
The regulations also 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:
- To pay plan administrative expenses
- To reduce employer contributions under the plan
- To increase benefits in other participants’ accounts in accordance with plan terms
The regulations also address forfeitures incurred under defined benefit plans. The proposed regulations would require such plans to expressly provide that forfeitures may not be applied to increase the benefits any employee would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions under the plan. Instead, the regulations clarify that “reasonable actuarial assumptions” must be used to determine the effect of expected forfeitures on the present value of plan liabilities under the plan’s funding method and the applicable minimum funding requirements imposed on defined benefit plans under the Code.
The regulations are proposed to apply for plan years beginning on or after Jan. 1, 2024, and include a proposed transition rule that would provide that any forfeitures incurred during any plan year that begins before Jan. 1, 2024, would be treated as having been incurred in the first plan year that begins on or after Jan. 1, 2024 — so that any such forfeitures would not have to be used for a permitted purpose until the end of the next plan year.
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