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| Doryanne Hamel, CPA, Manager |
Contact information: doryanneh@pgco.com
401-831-0200
Many defined contribution plans include a period of service requirement prior to a participant becoming fully vested in the employer contributions. Therefore, when an employee is terminated prior to meeting the full vesting requirement their non-vested account will be forfeited. Often, these forfeited account balances are transferred to a plan suspense account.
IRS Revenue ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participant accounts in accordance with a formula defined in the plan’s document. Therefore, plan administrators who allow the plan’s suspense account to accumulate forfeitures for a number of years may be risking the plan’s qualified tax-exempt status.
The plan document terms should include provisions for how and when forfeiture suspense accounts will be utilized. Plans may include a provision to reduce future employer contributions, pay plan expenses or allocate to participant accounts. A plan’s failure to use forfeitures timely denies plan participants additional benefits or reduced plan expenses.
To comply with IRS and ERISA requirements plan administrators should:
Review the provisions in the plan document for handling plan forfeitures to ensure the plan complies with IRS and ERISA regulations.
Monitor plan suspense accounts to ensure that forfeitures generated in any plan year are used in accordance to the provisions of the plan document.
If plan forfeitures have not been allocated properly, the plan administrator should apply the correction principles in Revenue procedure 2008-50, section 6 when making the correction. More information can be found on the IRS web site www.irs.gov/retirement.
ABOUT THE AUTHOR
Doryanne Hamel, CPA is a manager at the Firm and is responsible for audit, review, compilation and other accounting and tax engagements for a wide range of clients. She is qualified to perform employee benefit plan audits in accordance with the guidelines established by the AICPA Employee Benefit Plan Audit Quality Center. Contact Doryanne at doryannh@pgco.com or 401-831-0200.
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