Understanding Forfeitures in 401k Plans: Key Insights and Strategies

By Tiffany Cavanaugh June 11, 2025

I recently attended the AICPA & CIMA Employee Benefit Plans Conference held in May 2025, where topics ranged widely across employee benefit plan audits and operations. One significant topic was the handling of forfeitures in 401k plans. Below are a couple of key insights plan administrators should be aware of. 

What are forfeitures and how can they be used?  

Forfeitures represent the amount of a participant account that participants are not entitled to upon termination of employment. Employee deferrals are always 100% vested, but employer contributions can be subject to a vesting schedule. This will differ from plan to plan, depending on the vesting provisions with the plan document.   

Under proposed IRS regulations, forfeitures may be used to:  

(1) Pay plan expenses,  

(2) Offset future employer contributions, or  

(3) Allocate as additional contributions to participants.   

 This can also vary from plan to plan, depending on the language within the plan document, but the proposed IRS regulations clarify that these uses are all permissible.  

Litigation Trends 

Forfeitures have increasingly been the subject of recent litigation trends. There have been a variety of cases recently in the news targeting the allocation of forfeitures in 401k plans. Several class action lawsuits claim that using forfeitures to reduce future employer contributions, instead of paying administrative expenses, breaches fiduciary duty. The argument here is typically that an ERISA breach of fiduciary duty has occurred as using forfeitures to reduce employer contributions benefits the Plan Sponsor, not the plan participants. As previously noted, proposed IRS regulations do permit forfeitures to be used to reduce employer contributions.  

While these class action lawsuits are in various stages of litigation, we recommend that 401k Plan Administrators use this an opportunity to revisit the specific forfeiture provisions within their plan document. This confirms appropriate language regarding the use of  forfeitures is included and enables any necessary amendments, if required. We also recommend 401k Plan Administrators establish a formal policy regarding the handling of forfeitures.  

Buildup of Forfeiture Account Balances   

The buildup of forfeiture account balances has been a hot topic for a couple years now. In 2023, the IRS released proposed regulations that requires forfeitures to be used no later than the end of the plan year following the plan year during which the forfeiture occurred. Basically, the IRS wants forfeitures to be used no later than 12 months after the end of the plan year (e.g., forfeitures that occur in 2024 must be used by the end of 2025).  

Some plans have accumulated forfeiture balances over time that have not been used appropriately or in a timely manner. The IRS is aware of this and therefore provided transition relief within the proposed regulations for old forfeiture balances. According to the IRS transition rules, any forfeitures incurred during any plan year beginning before January 1, 2024 (the applicability date of the proposed regulations) are treated as having been incurred in the first plan year beginning on or after January 1, 2024. This essentially means that for a calendar year plan, a plan has until December 31, 2025 to fully utilize the existing 2024 built-up forfeiture balance (regardless what year(s) the forfeitures actually relate to).  The IRS will consider it an operation failure if forfeitures remain unused beyond the 12-month deadline.  

We recommend that 401k Plan Administrators review the forfeiture provisions with their respective plan documents and work with their service providers to ensure that any forfeiture build-up is used by December 31, 2025.  

Where to go from here?  

As we move through 2025, plan Administrators should: 

• Review their plan’s forfeiture provisions and ensure they align with the proposed IRS regulations, 

• Coordinate with service providers to track and apply forfeitures in a timely manner, and 

• Ensure that any forfeiture balances, especially those accumulated in prior years, are used by the December 31, 2025 deadline. 

If you have questions on handling forfeitures in 401k plans, reach out to Tiffany Johnson, or your BNN advisor.