Demystifying Forfeiture and Suspense Accounts
By Bill Ellis
Certain events in the life of a retirement plan may lead to some assets being temporarily allocated to special unallocated accounts, rather than being credited to a specific plan participant. This is the case with both forfeiture accounts and suspense accounts, which—perhaps not surprisingly—are sometimes confused with one another.
How does a retirement plan accumulate funds in a forfeiture account?
Forfeitures occur when a plan participant terminates employment before becoming fully vested in employer contributions in a qualified retirement plan. One of two events generally must occur before a plan administrator may move the participant’s unvested assets into a holding account, often referred to as a “forfeiture account”. The terminating participant must either 1) receive a full distribution, or 2) incur five consecutive one-year breaks in service.
Are there rules that define when forfeiture funds must be used and what they can be used for?
Forfeitures should ideally be used during the plan year in which they occur, but must be used by the end of the plan year following the plan year in which the assets were forfeited. A plan administrator is limited to only using forfeitures for the reasons listed below. Otherwise, an operational failure will occur.
Regular or partial payment of an administrative fee
Restoration of the participant’s account balance upon the participant’s rehire
Reduction of plan-approved employer contributions
Reallocation of funds to other participants
What if a plan administrator doesn’t use the assets in its forfeiture account in a timely manner?
If the plan fails to timely use forfeitures, and thus has an operational failure, it may be advisable for the plan administrator to seek competent legal counsel for assistance in correcting this failure. In general, under the IRS’s Employee Plan Compliance Resolution System (EPCRS), the correction would involve using the forfeited assets to fund an employer contribution, adjusted for lost earnings back to the start of the failure, which is the deadline by which the forfeitures should have been used. Furthermore, those who would have received the allocation at that time would have to be sought out and paid. However, the IRS released proposed regulations in February 2023 (which may be relied upon now), giving plans a one-time opportunity to resolve past failures. Plan administrators may treat all past unused forfeitures—from any year—as 2024 forfeitures. This means that they can be used for any of the acceptable forfeiture purposes in 2024, or 2025, at the latest. After this one-time grace period, normal procedures will apply.
How does a retirement plan accumulate funds in a suspense account?
A plan typically generates what are known as “suspense” dollars when the plan administrator corrects excess employer contributions in the plan. Once the excess contribution is identified, it—and the earnings it generated—are removed from any account to which it had been allocated and swept to a holding account, often referred to as a suspense account. Earnings to be removed are based on the plan’s earnings rate from the date that the excess funds were deposited to the date that the excess funds are removed from the plan. In accordance with IRS Revenue Procedure 2018-52, Section 6.06(4)(c), excess contributions and earnings placed into a suspense account are strictly limited to funding future employer contributions.
What do forfeiture and suspense accounts have in common?
Both forfeiture accounts and suspense accounts can be used to fund future employer contributions, under the principles of EPCRS. Conversely, neither forfeiture accounts nor suspense accounts can be used to fund corrections involving employee salary deferrals and their earnings, under the Department of Labor’s Voluntary Fiduciary Correction Program.
