In a 401(k) plan with a vesting schedule, participants earn ownership of employer contributions over time. If a participant leaves your company before becoming fully vested, any unvested employer contributions are forfeited. These amounts are moved into a forfeiture account and can be used by the plan under IRS guidelines.
Employee deferrals (pre-tax or Roth) are always 100% vested and are never subject to forfeiture.
Who This Applies To
This information is for 401(k) Plan Administrators and Plan Sponsors of plans with vesting schedules.
When Do Forfeitures Occur?
Forfeitures of unvested employer contributions occur in one of the following situations:
- When a terminated employee takes a full distribution of their vested account balance
- On the last day of the plan year in which a terminated employee incurs their fifth consecutive One-Year Break in Service (at the Plan Administrator’s request)
📌 One-Year Break in Service = a calendar year during which a former employee works fewer than 501 hours.
What Happens If an Employee With Forfeitures Is Rehired?
If a former employee is rehired before incurring five consecutive One-Year Breaks in Service, and their unvested balance has been forfeited, their forfeited amount may be restored—but only if:
- They repay their entire previously distributed vested balance, and
- The plan document allows for buyback provisions.
If this situation applies, contact us for help with the reinstatement process.
How Can Forfeitures Be Used?
Forfeitures may be used in the following ways:
- Offset Employer Contributions
- Reduce your funding obligation for employer match, profit sharing, or Top Heavy contributions.
- To request this, email us and ask to transfer forfeitures to your cash offset account.
- Pay Reasonable Plan Expenses
- Can cover administrative fees, plan restatement/amendment costs, or audit fees.
- Contact us to request that forfeitures be applied toward your plan fees until depleted.
- Allocate as a Profit Sharing Contribution
- Must be allocated to participants based on compensation and within IRS 415 limits.
- Will appear in participant accounts as a profit sharing contribution.
- Restore Forfeited Balances
- When a rehired employee meets buyback requirements and repays their prior distribution in full.
🚫 Forfeitures cannot be used to fund Qualified Non-Elective Contributions (QNECs) or employee deferral contributions.
When Must Forfeitures Be Used?
You must use forfeitures no later than the end of the plan year following the year they occurred.
Example: If a forfeiture occurs in 2024, it must be used by December 31, 2025.
Tax Considerations for Forfeiture Offsets
If forfeitures are used to offset employer contributions, you may only deduct the portion you actually deposit.
Example: If you fund a $30,000 profit sharing contribution and use $10,000 in forfeitures, you can only deduct $20,000 on your company’s tax return.
How to Check If You Have Forfeitures Available
You can see forfeiture balances in the Report Contributions screen on MyUbiquity.com, displayed as either:
- Forfeiture available, or
- Available Offset
If you believe forfeitures should be available but don’t see them, please contact us and let us know which terminated participant account you believe they came from.
Need Help Using Forfeitures?
If you’d like to use your forfeitures to offset employer contributions, pay plan fees, or have questions about your plan’s forfeiture provisions, please contact us.