The Internal Revenue Service (IRS) has been hinting in their annual guidance plans for years about updating regulations on forfeitures. These updates have now been outlined in the form of proposed regulations, providing a much-welcomed easing for plan sponsors who may have fallen behind in their forfeiture timings and uses. According to the Groom Law Group, these proposed updates, detailed in the 88 Federal Register 12282 (2/27/2023), will have far-reaching implications for both defined contribution and defined benefit plans.
Forfeitures, for those unfamiliar, are vested employer contributions that are reclaimed by a retirement plan when employees do not meet specific requirements, commonly provided as a means of incentivizing employment longevity. They can be used to reduce employer contributions, pay plan expenses, or be reallocated to other plan participants.
These newly proposed regulations serve a dual function. They specify not only the potential uses of forfeitures but also the timing for when forfeitures should be executed. This update will likely have significant implications for plan sponsors who have struggled with this aspect of plan management in the past.
Plan sponsors who have been less diligent with forfeiture timings and usage will appreciate the transition relief terms included in these proposed regulations. It offers them an opportunity to adapt to these new rules without facing immediate penalties, supporting greater plan compliance moving forward.
The proposed forfeiture rules will be of particular interest to corporations and law firms assisting with the management of these kinds of plans, as they will need to adjust strategies to comply with these newly proposed regulations by the IRS.
The new regulations are currently in the format of proposed regulations, which means that there may still be changes before they are enacted into law. However, they provide valuable insight into what to expect with these crucial elements of plan management in the future.
For more comprehensive details, legal professionals can reference the original proposals published on JD Supra.