Proposed Rule2023-03778
Use of Forfeitures in Qualified Retirement Plans
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Published
February 27, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth proposed regulations that would provide rules relating to the use of forfeitures in qualified retirement plans, including a deadline for the use of forfeitures in defined contribution plans. These proposed regulations would affect participants in, beneficiaries of, administrators of, and sponsors of qualified retirement plans.
Full Text
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<title>Federal Register, Volume 88 Issue 38 (Monday, February 27, 2023)</title>
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[Federal Register Volume 88, Number 38 (Monday, February 27, 2023)]
[Proposed Rules]
[Pages 12282-12285]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-03778]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-122286-18]
RIN 1545-BO98
Use of Forfeitures in Qualified Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document sets forth proposed regulations that would
provide rules relating to the use of forfeitures in qualified
retirement plans, including a deadline for the use of forfeitures in
defined contribution plans. These proposed regulations would affect
participants in, beneficiaries of, administrators of, and sponsors of
qualified retirement plans.
DATES: Written or electronic comments must be received by May 30, 2023.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-122286-
18) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish to the IRS's public docket, for public
availability, any comments submitted, whether electronically or on
paper. Send paper submissions to: CC:PA:LPD:PR (REG-122286-18), Room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
call Brandon M. Ford or Joyce I. Kahn at (202) 317-4148; concerning
submission of comments and requests for a public hearing, call Vivian
Hayes at (202) 317-5306 (not toll-free numbers) or email
<a href="/cdn-cgi/l/email-protection#621217000e0b010a0703100b0c0511220b10114c050d14"><span class="__cf_email__" data-cfemail="e69693848a8f858e8387948f888195a68f9495c8818990">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Background
General Forfeiture Rules for Qualified Plans
Section 401(a)(7) of the Internal Revenue Code (Code) provides that
a trust forming part of a stock bonus, pension, or profit-sharing plan
of an employer for the exclusive benefit of its employees or their
beneficiaries will not constitute a qualified trust under section
401(a) unless its related stock bonus, pension, or profit-sharing plan
satisfies the requirements of section 411 (relating to minimum vesting
standards).\1\ Section 411(a) generally provides that an employee's
right to accrued benefits derived from employer contributions must
become nonforfeitable after a specified period of service. Section
411(a) also provides exceptions to this general rule under which an
employee's benefit is permitted to be forfeited without violating
section 411, conditions under which forfeited amounts must be restored
upon a participant's repayment of a withdrawal, and other rules related
to vesting.
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\1\ There are parallel vesting requirements in section 203 of
the Employee Retirement Income Security Act of 1974, Public Law 93-
406, 88 Stat. 829 (ERISA). The IRS has interpretive authority over
that section pursuant to Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1, 92 Stat. 3790. (Reorganization Plan No. 4).
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Section 2(2) of the Self-Employed Individuals Tax Retirement Act of
1962, Public Law 87-792, 76 Stat. 809, added section 401(a)(8) of the
Code, providing that a trust forming part of a pension plan will not
constitute a qualified trust under section 401(a) unless the plan
provides that forfeitures must not be applied to increase the benefits
any employee would otherwise receive under the plan.
Section 1.401-7(a), promulgated in 1963, generally provides, in the
case of a trust forming a part of a qualified pension plan, that the
plan must expressly provide that forfeitures arising from severance of
employment, from death, or for any other reason may not be applied to
increase the benefits any employee would otherwise receive under the
plan at any time prior to the termination of the plan or the complete
discontinuance of employer contributions under the plan, and that the
amounts so forfeited must be used as soon as possible to reduce the
employer's contributions under the plan. Section 1.401-7(a) also
provides that a qualified pension plan may anticipate the effect of
forfeitures in determining costs under the plan, and that a qualified
plan will not be disqualified merely because a determination of the
amount of forfeitures under the plan is made only once during each
taxable year of the employer.
Section 1.401-1(b)(1)(i) provides that a pension plan is a plan
established and maintained by an employer primarily to provide
systematically for the payment of definitely determinable benefits to
employees over a period of years, usually for life, after retirement.
Section 1.401-1(b)(1)(i) further provides that benefits under a pension
plan are not definitely determinable if funds arising from forfeitures
on termination of service, or other reason, may be used to provide
increased benefits for the remaining participants. Section 1.401-
1(b)(1)(i) specifically refers to Sec. 1.401-7, relating to the
treatment of forfeitures under a qualified pension plan, in setting
forth the requirement that forfeitures not be used to provide increased
benefits for participants.
[[Page 12283]]
Section 1119(a) of the Tax Reform Act of 1986, Public Law 99-514,
100 Stat. 2085 (TRA 86), amended section 401(a)(8) of the Code to
replace the term ``pension plan'' (which includes a defined
contribution money purchase pension plan) with the term ``defined
benefit plan'' (which does not include a money purchase pension plan).
The conference report accompanying TRA 86 (Conference Report) explained
that, prior to TRA 86, forfeitures under a money purchase pension plan
could not be used to increase benefits, but were required to be applied
to reduce future employer contributions or to offset administrative
expenses of the plan, and that forfeitures in a defined contribution
plan that is not a money purchase pension plan could be reallocated to
the remaining participants under a nondiscriminatory formula, used to
reduce future employer contributions, or used to offset administrative
expenses of the plan. H.R. Rept. No. 99-841, at II-442 (1986). The
Conference Report also noted that the changes made by TRA 86 provided
uniform rules regarding the use of forfeitures under any defined
contribution plan and stated that, following these changes,
``forfeitures arising in any defined contribution plan (including a
money purchase pension plan) can be either (1) reallocated to the
accounts of other participants in a nondiscriminatory fashion, or (2)
used to reduce future employer contributions or administrative costs.''
Id.
Forfeitures in Defined Contribution Plans
Section 414(i) provides that a defined contribution plan is a plan
that provides for an individual account for each participant and for
benefits based solely on the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be allocated to
the participant's account.
Section 1.401-1(b)(1) provides rules related to specific types of
qualified retirement plans. Section 1.401-1(b)(1)(i) provides that a
pension plan (including a money purchase pension plan) is a plan
established and maintained by an employer primarily to provide
systematically for the payment of definitely determinable benefits and
that a plan will be considered a pension plan if employer contributions
can be determined actuarially on the basis of definitely determinable
benefits, or, as in the case of money purchase pension plans, such
contributions are fixed without being geared to profits. Section 1.401-
1(b)(1)(ii) provides that a profit-sharing plan must provide a definite
predetermined formula for allocating the contributions made to the plan
among the participants and for distributing the funds accumulated under
the plan. Section 1.401-1(b)(1)(iii) applies similar requirements to a
stock bonus plan.
Rev. Rul. 80-155, 1980-1 CB 84, provides that profit-sharing plans,
stock bonus plans, and money purchase pension plans are required to
provide for distributions in accordance with amounts stated or
ascertainable and credited to participants. The revenue ruling further
provides that amounts that are to be allocated or distributed to a
particular participant are ascertainable only if the plan provides for
a valuation at least annually.
A 2010 Newsletter of the Employee Plans office of the IRS's Tax
Exempt and Government Entities Division (Retirement News for Employers,
Vol. 7, Spring 2010) (the 2010 Newsletter) \2\ noted that some defined
contribution plan administrators place forfeited amounts into a plan
suspense account, allowing them to accumulate over several years, but
that the Code does not allow this practice. It advised that a plan
document should have provisions detailing how and when a plan will use
or allocate plan forfeitures, and it described deadlines for the use or
allocation of forfeitures.\3\
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\2\ <a href="http://www.irs.gov/pub/irs-pdf/p4278.pdf">www.irs.gov/pub/irs-pdf/p4278.pdf</a>.
\3\ In particular, the newsletter advised that generally ``[n]o
forfeitures in a suspense account should remain unallocated beyond
the end of the plan year in which they occurred,'' and that ``[f]or
those plans that use forfeitures to reduce plan expenses or employer
contributions, there should be plan language and administrative
procedures to ensure that current year forfeitures will be used up
promptly in the year in which they occurred or in appropriate
situations no later than the immediately succeeding plan year.''
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Forfeitures in Defined Benefit Plans
As originally enacted, section 401(a)(8) provided that a trust
forming part of a pension plan will not constitute a qualified trust
under section 401(a) unless the plan provides that forfeitures must not
be applied to increase the benefits any employee would otherwise
receive under the plan. As noted in the section of this preamble titled
``General Forfeiture Rules for Qualified Plans,'' section 1119(a) of
TRA 86 amended section 401(a)(8) of the Code to replace the term
``pension plan'' with the term ``defined benefit plan,'' with the
result that defined benefit plans continue to be subject to the rule
that forfeitures may not be used to increase benefits.
The use of forfeitures in defined benefit plans has also changed
since the issuance in 1963 of Sec. 1.401-7 (which provides that
amounts forfeited in pension plans must be used as soon as possible to
reduce employer contributions), due to the enactment of new minimum
funding requirements applicable to defined benefit plans. For example,
in 1974 ERISA added section 412 to the Code, which requires qualified
defined benefit plans (and certain qualified defined contribution
plans) to satisfy a minimum funding standard.\4\ Subsequently, the
minimum funding standards have been modified to provide differing
standards for different types of plans. See sections 430, 431, and 433.
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\4\ Section 302 of title I of ERISA sets forth minimum funding
standards that are parallel to the minimum funding standards in
section 412 of the Code. The IRS has interpretive authority over
section 302 of title I of ERISA pursuant to Reorganization Plan No.
4.
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None of the provisions that set forth minimum funding requirements
for qualified defined benefit plans allow required contributions to be
offset by forfeitures of accrued benefits. Instead, all of these
provisions require the use of reasonable actuarial assumptions to
determine the effect of expected forfeitures on plan liabilities. See
sections 430(h), 431(c)(3), and 433(c)(3). Any difference between
actual forfeitures and expected forfeitures is reflected in future
contributions required under section 412 pursuant to the funding method
used for the plan under section 430, 431, or 433.
Explanation of Provisions
Use of Forfeitures in Defined Contribution Plans
Consistent with changes made by TRA 86 providing uniform rules for
the use of forfeitures in defined contribution plans (as described in
the Conference Report), the proposed regulations would clarify that
forfeitures arising in any defined contribution plan (including in a
money purchase pension plan) may be used for one or more of the
following purposes, as specified in the plan: (1) to pay plan
administrative expenses, (2) to reduce employer contributions under the
plan, or (3) to increase benefits in other participants' accounts in
accordance with plan terms.\5\ The use of forfeitures to reduce
employer contributions includes the restoration of inadvertent benefit
overpayments and the restoration of conditionally forfeited participant
accounts that might otherwise require
[[Page 12284]]
additional employer contributions, for example, the restoration of
accounts conditionally forfeited under Sec. 1.411(a)-7(d) (relating to
certain distributions and cash-outs of accrued benefits).
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\5\ Additionally, under section 6001, plan administrators must
keep records necessary to demonstrate compliance with the
qualification requirements of section 401(a), including records
related to the use of forfeitures.
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Timing for Use of Forfeitures in a Defined Contribution Plan
The proposed regulations would generally require that plan
administrators use forfeitures no later than 12 months after the close
of the plan year in which the forfeitures are incurred. This deadline
is intended to simplify administration by providing a single deadline
for the use of forfeitures that applies for all types of defined
contribution plans and to alleviate administrative burdens that may
arise in using or allocating forfeitures if forfeitures are incurred
late in a plan year. The deadline in the proposed regulations is
similar to the deadline under Sec. 1.401(k)-2(b)(2)(v) for a section
401(k) plan to correct excess contributions by making corrective
distributions, which is 12 months after the close of the plan year in
which the excess contributions arise. The proposed regulations would
not affect generally applicable deadlines related to the timing of
contributions and allocations under a plan, such as the deadline for
correcting excess contributions to avoid excise taxes under section
4979 as set forth in Sec. 1.401(k)-2(b)(5)(i).
The proposed regulations provide a transition rule related to the
12-month deadline. Under this rule, forfeitures incurred during any
plan year that begins before January 1, 2024, are treated as having
been incurred in the first plan year that begins on or after January 1,
2024; accordingly, those forfeitures must be used no later than 12
months after the end of that first plan year. As described in the
section of this preamble titled ``Proposed Applicability Date,'' these
regulations are proposed to apply for plan years beginning on or after
January 1, 2024.
Although nothing in the proposed regulations would preclude a plan
document from specifying only one use for forfeitures, the plan may
fail operationally if forfeitures in a given year exceed the amount
that may be used for that one purpose. For example, if (1) a plan
provides that forfeitures may be used solely to offset plan
administrative expenses, (2) plan participants incur $25,000 of
forfeitures in a plan year, and (3) the plan incurs only $10,000 in
plan administrative expenses before the end of the 12-month period
following the end of that plan year, there will be $15,000 of
forfeitures that remain unused after the deadline established in these
proposed regulations. Thus, the plan would incur an operational
qualification failure because forfeitures remain unused at the end of
the 12-month period following the end of that plan year. The plan could
avoid this failure if it were amended to permit forfeitures to be used
for more than one purpose.
Use of Forfeitures in Defined Benefit Plans
The proposed regulations would update rules relating to the use of
forfeitures in defined benefit plans to reflect the enactment, after
the issuance of Sec. 1.401-7, of new minimum funding requirements
applicable to defined benefit plans. In addition, the requirement in
existing Sec. 1.401-7(a) that forfeitures under pension plans be used
as soon as possible to reduce employer contributions would be
eliminated because it is inconsistent with those minimum funding
requirements. The minimum funding requirements of sections 412, 430,
431, and 433 do not allow the use of forfeitures to reduce required
employer contributions to a defined benefit plan in the manner
contemplated by existing Sec. 1.401-7. Instead, reasonable actuarial
assumptions are used to determine the effect of expected forfeitures on
the present value of plan liabilities under the plan's funding method.
Differences between actual forfeitures and expected forfeitures will
increase or decrease the plan's minimum funding requirement for future
years pursuant to the plan's funding method.
Proposed Applicability Date
These regulations are proposed to apply for plan years beginning on
or after January 1, 2024. Thus, for example, the deadline for the use
of defined contribution plan forfeitures incurred in a plan year
beginning during 2024 will be 12 months after the end of that plan
year. Taxpayers, however, may rely on these proposed regulations for
periods preceding the applicability date.
Special Analyses
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
It is hereby certified that these proposed regulations will not
have a significant economic impact on a substantial number of small
entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter
6). The Treasury Department and the IRS understand that (1) plans
typically provide for the use of (and use) forfeitures in a manner
consistent with the proposed regulations and (2) defined contribution
plans typically use forfeitures by the deadline set forth in the
proposed regulations (consistent with the 2010 Newsletter).
Accordingly, for most plans, the proposed regulations are not expected
to require changes to plan terms or plan operations, or otherwise have
a significant economic impact on plans or plan sponsors. If any plans
have terms or operations that are inconsistent with the proposed
regulations, it is not expected that these proposed regulations will
have a significant economic impact on those plans or the sponsors of
those plans. For example, the proposed regulations do not require any
additional employer contributions or impose burdensome operational
requirements.
Notwithstanding this certification that the proposed regulations
would not have a significant economic impact on a substantial number of
small entities, the Treasury Department and the IRS invite comments on
the impacts these proposed regulations may have on small entities.
Pursuant to section 7805(f), these proposed regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the Treasury Department and the IRS as prescribed in this preamble
under the ADDRESSES heading. The Treasury Department and the IRS
request comments on all aspects of the proposed rules. Specifically,
comments are requested on the following topics:
<bullet> Whether the rules for the use of forfeitures in defined
benefit and defined contribution plans can be further simplified to
reduce administrative costs and burdens; and
<bullet> Whether any issues arise concerning other unallocated
amounts (in addition to forfeitures) with respect to qualified
retirement plans, and, if issues do arise, whether guidance should be
provided addressing those issues.
All comments will be available for public inspection and copying at
<a href="http://www.regulations.gov">www.regulations.gov</a> or upon request. A public hearing will be scheduled
if requested in writing by any person who timely submits written
comments. If a
[[Page 12285]]
public hearing is scheduled, notice of the date, time, and place of the
public hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Brandon Ford,
Office of Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes). However, other personnel from the
Treasury Department and the IRS participated in the development of
these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.401-1 [Amended]
0
Par. 2. Section 1.401-1 is amended by removing the fourth sentence of
paragraph (b)(1)(i).
0
Par. 3. Section 1.401-7 is revised to read as follows:
Sec. 1.401-7 Forfeitures under a qualified retirement plan.
(a) Forfeitures under a qualified defined benefit plan. In the case
of a trust forming a part of a qualified defined benefit plan (as
described in section 414(j)), the plan must expressly provide that
forfeitures may not be applied to increase the benefits any employee
would otherwise receive under the plan at any time prior to the
termination of the plan or the complete discontinuance of employer
contributions thereunder. However, the effect of forfeitures may be
anticipated in determining the costs under the plan. See sections
430(h)(1), 431(c)(3), and 433(c)(3), as applicable, regarding the use
of reasonable actuarial assumptions in determining the amount of
contributions required to be made under a plan to which one of those
sections applies.
(b) Forfeitures under a qualified defined contribution plan. In the
case of a trust forming a part of a qualified defined contribution plan
(as described in section 414(i)) that provides for forfeitures, the
plan must provide that:
(1) Forfeitures will be used for one or more of the following
purposes:
(i) To pay plan administrative expenses;
(ii) To reduce employer contributions under the plan; or
(iii) To increase benefits in other participants' accounts in
accordance with plan terms; and
(2) Forfeitures will be used no later than 12 months following the
close of the plan year in which the forfeitures were incurred under
plan terms.
(c) Transition rule for forfeitures incurred during plan years
beginning before January 1, 2024. For purposes of paragraph (b)(2) of
this section, forfeitures incurred during any plan year that begins
before January 1, 2024, will be treated as having been incurred in the
first plan year that begins on or after January 1, 2024.
(d) Applicability date. This section applies for plan years
beginning on or after January 1, 2024.
Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-03778 Filed 2-24-23; 8:45 am]
BILLING CODE 4830-01-P
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