We have a 401(k) plan that includes several different types of contributions—employee deferrals, a company-provided safe harbor match, and a profit sharing contribution. The plan has a 6-year graded vesting schedule.
What contributions are subject to the vesting schedule and what do we do with non-vested amounts for former employees?
The retirement plan rules specify that certain types of contributions can never be subject to a vesting schedule. In other words, they must always be completely vested. Those contribution types include the following:
- Employee deferrals (both pre-tax and Roth),
- Employee rollovers, and
- Safe harbor contributions (unless the plan has certain automatic enrollment and escalation features for deferrals).
Other types of contributions are subject to the vesting schedule specified in the plan document.
In this case, employee deferrals and the safe harbor match are fully vested, and the profit sharing contribution is subject to the 6-year vesting schedule. There are specific rules that are used to determine how many years of service are credited to each employee.
When a participant with a balance in the plan terminates employment and is not fully vested, the non-vested portion is subject to forfeiture. Although each plan document will specify the timing of that forfeiture, the most common timing is on the earlier end of a complete payout of the vested portion or when the participant has incurred a 5-year break in service.
When that occurs, the non-vested portion of the account should be transferred into the plan’s forfeiture account, which is typically just a separate recordkeeping account and not a completely separate physical account. The plan’s forfeiture account is different from other types of holding accounts such as a suspense account or ERISA spending account, so be sure to move those forfeitures to the correct place.
The plan document will tell you how forfeited accounts must be used. The available uses include:
- Paying plan administrative expenses,
- Off-setting company contributions, and
- Allocating as additional company contributions.
The document will also specify when forfeitures must be used. Sometimes, a plan will limit usage to either the year of the forfeiture or the following year. What we see more often, however, is that forfeitures must be used no later than the end of the year after the year the forfeiture occurred, essentially providing up to two years.
It is especially important to note that the timing for usage is mandatory. In other words, it is not acceptable to let forfeitures accumulate over time before using them, no matter how small the amount. So, for example, if the plan terms require usage no later than the end of the following year, then any forfeitures that are generated during 2017 must be used to pay expenses, offset contributions or be allocated as additional contributions no later than the end of the 2018 plan year.
To ensure forfeitures are used in a timely way, we suggest that you monitor the account on an ongoing basis and use accumulated amounts as soon as possible. For example, if certain plan fees are billed quarterly and your plan allows forfeitures to pay plan expenses, check the forfeiture account when you receive each quarterly invoice. Some recordkeepers allow you to specify that quarterly fees will automatically be charged to the forfeiture account first with any remaining balance due charged to either the company or participant accounts.