Are you part of an Employee Benefit Plan or EBP? In the following BDO Seidman article, we discuss what happens when you don’t take advantage of such plans, and how you could be forfeiting a sizable personal investment. *

“Mr. Forfeiture” will not have an enrollment form for his Employee Benefit Plan (EB) or receive a salary from the plan sponsor. Typically, his social security number is 999-99-9999. He is not an actual participant, but his account in your EB plan may represent the non-vested portion of terminated participants’ account balances for matching or non-elective employer contributions.

In defined contribution plans, forfeitures occur when participants fail to complete a period of service before becoming fully vested in the employer’s contributions. When a participant terminates before completing the service requirement, as defined in the plan document, his or her non-vested account may be forfeited. Some plan administrators place these forfeited amounts into a suspense or forfeiture account, sometimes commonly titled as “Mr. Forfeiture,” and allow these forfeitures to accumulate over several years.

However, this practice is not allowed under the Internal Revenue Code (IRC). The plan document should contain language that details how and when a plan can use the forfeitures. Forfeitures may generally be used to pay a plan’s administrative expenses, to reduce employer contributions or be allocated among participants on at
least an annual basis. Plan sponsors and third-party administrators need to monitor plan forfeitures periodically to ensure that forfeitures generated in a plan year are used in accordance with the plan document. If the plan document allows for forfeitures to reduce employer contributions, this may assist in the plan sponsor’s cash management.

All funds in a defined contribution plan must be allocated to participants or it jeopardizes its qualified plan status. If your plan has been accumulating a balance in a forfeiture account, then there may be an operational error that will need to be corrected. Plan sponsors can correct this error using the Employee Plans Compliance Resolution Systems (EPCRS) with the IRS. Depending on the length of time between the error and the correction, the Plan would use either the Self Correction Program or the Voluntary Correction Program.

*This article originally appeared in BDO USA, LLP’s “EBP Commentator Winter 2011 – Recent EBP Developments“. Copyright © 2011 BDO USA, LLP. All rights reserved.