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November 7, 2022

Benefits of Clearing 401(k) Forfeiture and Holding Accounts

As we near the end of a Plan year for those who oversee their company’s 401(k) Plan administration, we wanted to focus this month’s blog post on an area that is often neglected. Most Plans have something called a Forfeiture Account.   

If your 401(k) Plan has made employer contributions to your company’s 401(k) account, you may have built up amounts in an account called “Forfeitures.” In some cases, the account may be called a “Suspense” or “Holding” account. The terminology depends on the vendor. This account holds amounts that accrue when an employee leaves the Plan, and their account is not fully vested. Forfeiture accounts need to be cleared as soon as possible but only for the transactions allowed by the Plan Document.  Usually, the funds can be used to pay Plan expenses or to fund future employer contributions.  

Utilizing Forfeiture Accounts  

These amounts are still a part of the Plan, but they are not allocated to any specific participants. For this reason, the Department of Labor and ERISA requirements specify that amounts in these funds should be utilized as quickly as possible, so they are used by the Plan. Some Plan documents also allow for forfeiture amounts to be allocated to existing Plan participants. In the event of a Plan termination, this is often how the funds are ultimately disbursed.  

It is important to review the Plan financial reports to see if you have any forfeitures that can be utilized. Ask your service provider for assistance, if needed. Year-end is a good time to review the account and discuss with your service provider the plan for using these funds either by year-end (preferably) or through the next Plan year. 

Keep in Touch with Former Employees Possessing Active 401(k) Plans    

Funds can also accumulate in this account due to distributions made to a participant but the funds (usually made via a check payment mailed to the participant’s last known address) are returned uncashed to the Plan. For these funds, you should work with the service provider to identify the participant the funds relate to. Then make your best attempt to locate the participant or their beneficiaries. It is the responsibility of the Plan Sponsor to ensure all participants receive their requested amounts.  

You can check with your Human Resources area or with other benefit providers to try and locate a current address. Also, you may want to check with existing employees to see if they have kept in touch with the terminated employee. A best practice is for 401(k) Plans to establish periodic communication with separate employees that still have an active 401(k) account so the Company can ensure the funds are disbursed to the employee upon request.  

Another best practice is to encourage the employee to move their funds out of the 401(k) Plan account soon after termination. Many Plan Documents allow for smaller accounts to be moved to an IRA account in the name of the participant in the event the participant has terminated, and they cannot be reached. Ultimately if the participant cannot be located, the funds cannot be returned to the employer or simply used by the Plan for other purposes. Work with your service provider to examine the options available to have the funds removed properly from the forfeiture/suspense/uncashed check account. 

The forfeiture account for your Plan is an important feature and should not be neglected. It is a source of funds for future employer contributions or a way to pay Plan expenses. It also may include amounts due to terminated employees. It is an important aspect of ensuring your Plan remains compliant to work with your service provider to use the funds or have the uncashed check amounts handled properly. Year-end is a good time to review this account and make plans for the disposition of the amounts. 

For more information on how our 401(k) audit team can help, request a free consultation below or contact Kim Moore at (260) 918-8824 to discuss your unique 401(k) audit needs.

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