401(k) forfeitures are the unvested portion of employer contributions that employees lose if they leave before they are fully vested. Those dollars move into a forfeiture account inside the plan and can only be used in specific ways allowed by the plan document.

Most employers that offer a 401(k) as a benefit have rules about funds being vested. It’s not uncommon for employers to require that employer-matched funds remain non-vested for five or more years. But what happens to that money if an employee leaves before they have full rights to the cash?

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What is a 401(k) forfeiture account?

A forfeiture account holds unvested employer contributions that participants forfeit when they leave before fully vesting. Plan sponsors can typically use forfeitures to pay plan expenses or offset future employer contributions — but only as allowed by the plan document.

What does “401(k) forfeiture” mean?

A 401(k) forfeiture is the unvested portion of employer contributions that a participant does not earn before leaving employment. Those funds stay in the plan and move into a forfeiture (or holding/suspense) account until used under the plan’s rules.

Forfeitures In 401(k) Plans Are Common

When an employee walks away from a job where they had a 401(k), they are fully vested in any money they deposited. But, when the company deposits money – 401(k) matching is a common benefit – and the employee quits, they may not be entitled to the employer-funded portion. This money is then forfeited and placed into a separate accounting account.  

Forfeitures in 401(k) plans may be more common than you think. Many employers graduate vesting amounts based on the number of years of service. It’s not unusual for a business to require six years of employment before an employee is fully vested in the company’s contribution. However, the average number of years worked at most jobs is just around four. This means that at least a portion of many 401(k) accounts are forfeited. 

What Happens to Non-Vested Money?

All non-vested money gets transferred to the 401(k) plan’s forfeitures account. But, this doesn’t mean that the company and plan sponsors have unrestricted access to the money. Instead, it can only be used for specific purposes outlined in the plan documentation. Typically, forfeiture funds are available to help cover plan expenses, or they can be recycled and used as future employer contributions.

How can forfeiture funds be used?

In some cases, forfeiture funds cannot be used freely. Their use depends on how they were created and the specific provisions outlined in the plan document.

Depending on your plan document, forfeitures are typically used to:

• Pay plan administrative expenses
• Offset future employer contributions
• In some plans, increase benefits for other participants (if explicitly allowed)

Some plans accumulate significant forfeiture balances over time simply because the plan has not had an opportunity to use them under its permitted uses.

Make sure you’re dealing with true forfeitures — not “stale checks” (distribution checks that were issued but never cashed). Stale checks require a different process because the participant may still be owed the money.

Proposed IRS 401(k) Forfeiture Rules Took Effect in 2024 

IRS forfeiture rules codify these policies, which are already in place with some employers but weren’t officially listed in federal regulations. The updated rules took effect in 2024 and provide more flexibility for Plan Sponsors. The rule would allow employers to use any forfeitures to pay plan administrative expenses, reduce employer contributions under the plan and increase benefits in other participants’ accounts.  

In general, plan administrators are required to use forfeitures no later than 12 months after the close of the plan year in which the forfeitures occurred. These rules particularly affect larger employers, giving them more flexibility when it comes to forfeitures in retirement plans. 

How Do I Know if I Have 401(k) Plan Forfeiture Funds Available?

Talk to your CPA. They can show you your money line by line, including your forfeitures. You should also be aware that timing is everything when using forfeiture funds in a 401(k) plan. You cannot just let them accumulate, and your best bet is to use them as soon as feasibly possible. For this reason, it’s prudent to know your account balance. 

When an employee leaves without being fully vested in their 401(k) account, that money goes into a forfeiture fund. Forfeitures and 401(k) plans are common, but you must use the money quickly and in a way that aligns with your plan’s documentation. 

If forfeiture balances are not reviewed and used regularly, they can accumulate over time and create compliance concerns. If your plan has accumulated forfeitures (or a holding/suspense account balance), see Benefits of Clearing 401(k) Forfeiture and Holding Accounts for practical steps to review balances and apply them correctly.

Managing forfeiture accounts correctly is just one of several areas reviewed during a 401(k) audit. Ensuring these funds are used in accordance with your plan document and within required timeframes can help avoid compliance issues and support a smoother audit process.

To get started, request a free 401(k) audit consultation below.