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Warner Norcross + Judd LLP is a corporate law firm with over 230 attorneys serving clients in nine offices throughout Michigan. Among the largest law firms in Michigan, Warner works in virtually all areas of business law.

Michigan Law Firm - Warner Norcross + Judd LLP

At Warner Norcross + Judd LLP, we understand that running an automotive supplier business involves more than just industry-specific issues. That's why we regularly provide important insights and tips on broader legal trends to help you navigate challenges and keep your business thriving.

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Today, we highlight news from the employee benefits sector involving forfeitures and other unallocated accounts in defined contribution retirement plans, such as 401(k) plans.

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Let’s first start with the definition of a “forfeiture.” When a partially vested participant terminates employment and takes a distribution of his or her vested balance, the amount left behind is called a forfeiture. Plan sponsors have some discretion in how they use forfeitures, but some restrictions apply.

A recent <a href="https://www.wnj.com/updates/attention-forfeitures-and-other-unallocated-accounts-in-retirement-plans-need-review/" target="_blank" rel="noreferrer noopener">eAlert</a> drafted by our Employee Benefits Practice Group highlighted recent issues regarding how retirement plans apply forfeitures and other unallocated accounts.

The Internal Revenue Service (IRS) has set timing deadlines for plan forfeiture use. Prior to recent proposed regulations from the IRS, the timing for when defined contribution plans must use forfeitures had been murky.

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Participants in retirement plans have brought legal challenges to plan sponsors exercising discretion to use forfeitures to reduce employer contributions.

Some plan providers are improperly mixing forfeitures with other unallocated funds.

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Key Takeaways for Plan Sponsors

To provide you with a concise overview of what employers need to know about this development, here are the key takeaways from our more robust <a href="https://www.wnj.com/updates/attention-forfeitures-and-other-unallocated-accounts-in-retirement-plans-need-review/" target="_blank" rel="noreferrer noopener">eAlert</a>:

Review your plan document and ensure that:

Be aware that some plan participants are litigating the use of forfeitures to reduce employer contributions, despite the IRS having accepted this practice for decades both in plan documents and on review in audits. Fiduciaries and employer sponsors should monitor these cases as they progress and may want to take action regarding their plan language and use of forfeitures.

Maintain your forfeiture account separate from other unallocated accounts, such as suspense account funds or ERISA spending account funds, to reduce employer contributions. If this is not possible, plan recordkeepers should maintain thorough records that distinguish the sources of funds in a single account.

Keep sufficient records to show how and when you use forfeitures and other unallocated accounts.

If your plan provides discretion to apply forfeitures to pay expenses or reduce employer contributions, consider whether an amendment would be appropriate. If in practice you are consistently applying forfeitures using the same method each year, then we recommend amending your plan to eliminate that discretion. If you are exercising that discretion from year to year, then we recommend you contact us to discuss whether an amendment would be appropriate in your circumstances.

For a more detailed review of the changes with forfeitures and other unallocated accounts, please read our recent employee benefits <a href="https://www.wnj.com/updates/attention-forfeitures-and-other-unallocated-accounts-in-retirement-plans-need-review/" target="_blank" rel="noreferrer noopener">eAlert</a>.

If you need assistance reviewing your plan documents, revising your administrative procedures or drafting a plan amendment, please contact Mary Jo Larson, Justin Stemple, Brandon Cross, your Warner attorney or a member of our Employee Benefits Practice Group.

Ahead of the Curve Auto Supplier

Automotive

Supply Chain

Associate

Brandon P. “Bran” Cross

Of Counsel

Mary Jo Larson

Partner

Justin W. Stemple

Employee Benefits

Attention Auto Suppliers: Don’t Leave Money on the Table Through Unused Retirement Forfeitures and Unallocated Accounts

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Attention Auto Suppliers: Don’t Leave Money on the Table Through Unused Retirement Forfeitures and Unallocated Accounts

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