The IRS will issue proposed regulations governing the use of forfeiture in eligible retirement plans.Mursa Kalina


The IRS recently clarified and updated existing rules governing when and how forfeitures must be used in eligible defined contribution (e.g. 401(k)) and defined benefit retirement plans. issued a draft rule.

If a participant terminates employment for any reason before 100% is attributed to his plan account (for defined contribution plans) or accrued benefits (for defined benefit plans), forfeiture will occur under the plan. , thereby causing revocation. You will lose any unsettled portion of your account or unpaid profits.

Lapse of Defined Contribution Pension

Permitted use of forfeiture. Consistent with the changes made by the Tax Reform Act of 1986 that set out uniform rules for the use of forfeitures in defined contribution plans, the proposed rule would allow forfeitures arising in defined contribution plans (including money purchase pension plans) to be One or more of the following purposes, as specified:

  1. For payment of plan management fee
  2. Reduce employer contributions under the plan.again
  3. To increase the benefits of other participants’ accounts in accordance with the terms of the plan.

The use of forfeitures to reduce employer contributions includes recovery of inadvertent benefit overpayments and conditional forfeitures that may otherwise require additional employer contributions. Includes recovery of lost participant accounts.

Expiration date for forfeiture. The proposed rule also provides clear rules requiring when lapses must be used in defined contribution plans. The proposed rule would normally require plan administrators to use forfeitures within 12 months after the end of the plan year in which the forfeiture occurred. This deadline simplifies plan administration by creating a single forfeiture use deadline that applies to all types of defined contribution plans (e.g. 401(k), profit sharing, money purchase pension plans). The aim is to streamline and reduce the administrative burden. Occurs on use or allocation of forfeitures that occur later in the plan year.

The proposed rule provides transitional rules related to a 12-month deadline for using lapses in defined contribution plans. Under the Transition Rules, forfeitures that occur during a plan year beginning before January 1, 2024 will be treated as occurring in the first plan year beginning after January 1, 2024. Within 12 months after the end of the first planning year.

There is nothing in the proposed rule to prevent a defined contribution plan document from specifying only one use of forfeits, but if forfeits in a particular plan year exceed the amount available for that one purpose. , the plan may fail operationally. For example, if (1) the plan documents state that forfeitures may only be used to offset the administrative costs of the plan, (2) the plan participant will incur forfeitures of $25,000 in the plan year and ( 3) The plan only incurs a $10,000 administration fee for the plan. Before the end of the 12-month period following the end of that plan year, he will have a forfeiture of $15,000 if he remains unused after the deadline set in the proposed rule. The plan would therefore result in a failure of operational eligibility as the forfeiture would remain unused at the end of his 12-month period after the end of the plan year. Plans can avoid this failure by modifying the forfeitures to serve multiple purposes.

Lapse of defined benefit plans

Section 401(a)(8) of the Internal Revenue Code provides that forfeitures incurred under a defined benefit plan may not be used to increase the benefits a member receives under the plan. (This rule requires that a defined benefit plan meet the basic rules that require it to systematically provide “reliably determinable benefits” to employees for many years after retirement, usually for life. ensure: it is not “definitely determinable” if the funds resulting from the forfeiture at the end of employment under the defined benefit plan could be used to increase the benefits of the remaining participants.)

The existing IRS Regulation Section 1.401-7(a), promulgated in 1963, requires defined benefit plans to use forfeiture “as soon as possible to reduce the employer’s burden under the plan.” However, none of the statutory provisions (i.e., statutory sections 430, 431, and 433) establishing minimum funding requirements for defined benefit plans (all enacted after 1963) – Contributions required, forfeiture of unpaid benefits. Instead, all of these minimum funding provisions of the Code require the use of reasonable actuarial assumptions to determine the impact of expected lapses on pension obligations. The difference between the actual and expected forfeitures shall be paid by prospective employers to plans required under Code section 412, according to the funding method used for the plan under Code sections 430, 431, or 433. will be reflected in the contribution of

The proposed rule would eliminate the requirement of existing IRS rule section 1.401-7(a), which conflicts with the Code’s current minimum funding requirements, so to reduce the burden on employers, Should use confiscation sooner. The proposed rule would require defined benefit schemes to explicitly provide that forfeitures do not apply to increase participants’ benefits, and consistent with the Code’s existing minimum funding provisions, would require reasonable mathematical assumptions to predict the impact of the forfeiture on the present. The value of plan obligations based on how the plan is financed.

Proposal effective date

The proposed rule will apply to plan years beginning on or after January 1, 2024. So, for example, forfeitures incurred in a plan year starting in 2024 will expire 12 months after the end of that plan year. However, taxpayers can rely on the proposed rule for periods prior to the effective date. The public comment period for the proposed rule is scheduled to end on May 30, 2023.

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