Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Forfeitures – how do they affect you as a plan participant?

forfeitures, forfeiture, 401(k), employee benefit plans401(k) plan forfeitures occur when a participant terminates employment (voluntarily or involuntarily) prior to satisfying the required service years to become fully vested in his/her account. Required service years will vary by plan, but can be found in your summary plan description. The portion of your account subject to forfeitures is the portion that is contributed by the employer, typically, through an employer matching contribution or an employer discretionary profit sharing contribution. Participants are generally always 100% vested in the contributions made by the participant.

Plan administrators can typically utilize forfeitures to pay plan expenses, to reduce employer matching contributions or employer discretionary profit sharing contributions, or to allocate to existing participants on a pro-rata basis. (Specific uses are governed by the plan document.)

Example

The following example assumes an employee has satisfied three service years and the employer has contributed $1,000 to the employee’s account. Additionally, the plan has the following vesting schedule documented in its plan document.

Service yearsVesting % earned
120%
240%
360%
480%
5100%

Given the detail above, the individual is 60% vested in the employer contributions and will receive $600 of the $1,000 in the account. The formula for the forfeited portion is: forfeited portion = total employer contribution balance x (1 – % vested).

Don’t miss: employer match options for your 401(k)

As a participant, it is important to know your 401(k) plan’s forfeiture and vesting policy (found in your plan document or summary plan description) to ensure the following:

  1. The proper amount of termination benefit is paid to you, upon termination.
  2. If you have received an underpayment of termination benefits, the plan may be responsible to compensate you for the underpayment and any lost earnings potential on that underpayment.
  3. If you have received an overpayment of termination benefits, you may be obligated to reimburse the plan by the overpayment amount.
  4. The plan administration is properly utilizing forfeitures received, (i.e. if forfeitures are to be remitted to existing participants, then you will want to ensure you receive your correct portion).

Some issues that typically result in forfeiture calculation errors are:

  • The participant has a “break in service” (an extended absence from employment),
  • The plan document is amended and also amends the vesting schedule,
  • Partial plan termination is incurred, and
  • Inaccurate records of employer contributed balances versus participant contributed balances

The previous issues should be carefully considered when verifying if your forfeitures were calculated correctly.

Victor Fuentes

Comments

  1. jello2015 says:

    Hello,
    I have been very careful not to exceed this year’s 53,000 IRS limit between my pre-tax (less than the 18,000 yearly limit), after-tax contributions, and company matches. However, I read about the allocation of forfeitures that a company can allocate from other employees to my account, which I have no control over. If my company allocates other employees’ forfeitures to my account pushing me over the 53K limit, are they able to distribute to me the excess next year (even if I will no longer be employed by them next year)?. I just terminated employment with them and I plan to roll-over my pre-tax to another employer’s 401k and my after-tax to my Roth IRA, so I would not want to have to deal with reverting any of those rollovers due to a corrective distribution next year from my former employer. Thanks in advance.

    • admin says:

      Thank you for your question. It depends on how the plan document defines the reallocation of forfeitures and whether you have to be employed at the end of the plan year for any reallocation. If there are funds to reallocate to you after you have already transferred out your funds, the third-party administrator can have your account reopened, forfeitures reallocated and then distributed.

      Kevin C. Bach, CPA, CVA

  2. Jason Sullivan says:

    So before I think I have been swindled, is the termination distribution what I will receive and if so how long does it typically take? I left a company after almost 2 years and wasn’t quick enough to rollover my 401K. Also what is forfeiture debit? I don’t know a lot about this stuff but I do know I may have just lost a large chunk of change. Your help is greatly appreciated.
    Thank you

    • admin says:

      Hi Jason,

      I am assuming you were a participant in a 401k plan. If that is correct, than you should have been entitled to the balance in your account that you electively contributed, immediately after you stopped working for that company. If you are receiving 401k plan statements, you should call the telephone # on the statement to ask how to take your money out and roll over to an IRA, roll-over to a new employer’s benefit plan, or to receive a cash payment. A forfeiture is a dollar amount that you did not earn because you did not work for the company long enough. For example, many company’s Plan’s will have a service requirement that an employee be employed with the company for a specific # of years before they receive 100% of the Employers contributions to your account. For example if the Employer is putting in money in your account, they may say that you earn this money 20% a year for 5 years. If you only worked for the company for one year, then you would have only earned 20% of the Employer contribution, and the remaining 80% would be forfeited.

      Victor Fuentes

    • newyork10024 says:

      Work in a company where we are vested 100% year one
      Every year for 10 years…., we fail the nondiscrimination test and receive back 2 checks
      -one for employee contribution + yearly earnings
      -one for employer match + yearly earnings
      This year, the company decided not to give back the employer matching therefore we got only 1 check (employee contribution + yearly earnings)
      Is this legal to change the rule we had for years without informing employees before ?
      also
      is it legal for the employer to keep even the earnings from the employer contribution
      best

    • admin says:

      Thank you for your question:

      I am assuming your Plan is a 401k plan. The general rule for 401k plans (for nondiscrimination testing failures) is that the “excess employee contributions + yearly earnings” are to be refunded to the employee, within a specific period of time, following the Plan’s year end. The Employer match attributable to the “excess employee contributions” plus the related earnings on the employer match, is generally supposed to be forfeited to the Plan’s net assets (not the Company’s bank account). The Plan can then use these “forfeited” amounts in accordance with what the Plan Document allows. So, it sounds like your Company/Plan was improperly refunding the Employer Match portion to employees for 10 years, and they finally identified their mistake.

      I would discuss it with your named Plan Trustee, who should be named in your Plan’s Summary Plan Description for a “direct response”.

      Hope this helps.

      Victor Fuentes

    • Casey says:

      I am 100% vested in the employer contributions into my 401k, and I didn’t make any contributions. I left my company and owe my company money back for some draws. Can I voluntarily forfeit my 401k to my former employer so I can satisfy the amount I owe to my former employer? That would be the only way that I could pay the money that I owe the company.

      Any insight would be greatly appreciated.

    • admin says:

      Casey –

      Thank you for the question. Technically, your former Employer and the Plan are two separate entities, so the Plan would not allow for your 401k account to be directly forfeited to the Company.

      You would need to obtain your Plan’s (SPD – Summary Plan Description) to identify the withdrawal rights you are allowed. Typically, when you are no longer employed with the Company you can take your 100% 401k vested balance and have that paid to you, in which case you can use it to pay for the draws. However, you will be taxed on this distribution and if you are under 59.5 years of age, you will be taxed an additional 10% penalty on the withdrawal amount.

      One other scenario you could try is as follows: You can have your former Employer transfer your 401k money into your new Employer’s 401k Plan. Then, you can take a loan out of the new Plan that you rolled your money into. You will have to make loan repayments (to your own 401k account), typically through payroll, but the repayment amounts are typically small. You would first have to verify with your new Company’s 401k Plan if they allow loans.

      Victor Fuentes

  3. T. Brown says:

    I worked for a Company 18 months, and was laid off,and they took my 401K as Termination Forfeiture, the account had over $9,000 in it. The money was the return on the investment I made with the money I contributed to the account. This company claims the money belongs to them because it was their match, this is not true. Is there anything I can do to get a portion of that money back, I understand there are rules, but I thought they had to split a portion of that with me, since I was close to finishing 2 years with this company.

    • admin says:

      Thank you for your question. You should have received a Statement showing your full account $ value. This statement should have shown your personal contributions/balance and related investment earnings, and it should have shown the Company’s contributions (match) and the related earnings on their match. You are entitled to 100% of your personal contributions/balance and related investment earnings. The Company’s contributions(match) is typically earned by you (vested) over a period of 1 to 6 years, depending on the Plan’s vesting policy. You can request the vesting policy to ensure proper calculation of your vesting. I would recommend you obtain a copy of your last 401k Plan statement to ensure you were paid the correct amount.

      Victor Fuentes

    • Patrick says:

      Hi Victor & Admin,

      Thank you for the great post. I worked for a Company for 3 years and was laid off in 2008.

      401K in 2008
      $66k (mine $33k & matching $33k)

      In 2014
      Grown to $110k ($55k each)

      Now the Company took $13.7K, 25% of $55K, as Termination Forfeiture.

      In my case, 100% vesting is 4 years+, so taking 25% of $33k (the original matched amount) may be ok. However, taking 25% of $55k doesn’t sound right considering my 5 year efforts to increase the entire amount.

      Also, both signed a termination letter, mentioning “This release shall not affect your vested rights under the Company’s 401(K) plan or your right under this Agreement.”

      Is there anything I can do to get a portion of that money back? Thank you.

    • admin says:

      Patrick –

      Thank you for the question. Unfortunately, the Employer and the Plan did the correct calculation. Your non-vested portion (25% in your scenario) is to be applied to the total Employer balance including earnings ($55K of Employer match in your scenario). The theory behind this is that you did not meet the service requirement to earn the 25% of $33K Employer Match, thus you do not earn the related earnings on this portion either.

      Victor L. Fuentes