In the future, Plan Sponsors Will Have to Pay More Attention to Allocating Unused Balances in Forfeiture and Revenue Credit Accounts
Historically there has been little formal guidance from either the Treasury Department or the IRS concerning forfeiture and revenue credit accounts. In February, the Treasury Department published a proposed regulation regarding the use and timing of assets held in plan’s forfeiture accounts. The good news is the proposed regulation, by and large, conforms to the industry’s prevalent understanding of the use and timing of forfeitures.
In the absence of formal guidance, it has been the general understanding forfeitures may be used in one of three ways:
Paying reasonable plan expenses such as recordkeeping fees,
Reducing employer contributions, or
Allocating to participants’ accounts.
A revenue credit account exists where plan investments generate revenue credits to cover the cost of recordkeeping exceeding the record keeper’s fee. In this circumstance, the recordkeeper allocates the excess to a revenue credit account.
It has been the general understanding the balance in revenue credit accounts may be used in the same manner as the balance in forfeiture accounts, with the exception the amounts in such accounts cannot be applied to offset employer contributions because these credits originate from participant accounts.
With regard to timing, it has generally been understood the balance in forfeiture and revenue credit accounts must be exhausted by the end of the plan year and may not remain unallocated from year to year. The IRS confirmed this in a newsletter issued in 2010, stating the balance in forfeiture accounts should be allocated by the end of the plan year in which the forfeitures occur. However, the IRS has never made a serious effort to enforce this rule and plan sponsors are often allowed the balances in forfeiture and revenue credit accounts to grow year over year.
The proposed regulation confirms the general understanding these amounts should not remain unallocated indefinitely. With regards to timing, the proposed regulation requires the balance in a forfeiture account be allocated within 12 months of the end of the plan year in which the forfeitures occur.
The proposed rule has an effective date of January 1, 2024. There is a transition rule which treats forfeitures that occur prior to this effective date as if they had occurred in 2024.
With clear guidance on the timing of forfeitures, it seems likely the IRS may step up its enforcement efforts.
Although this guidance does not mention revenue credit accounts, it may be arguable similar timing could apply to their usage in similar fashion as forfeiture accounts. It is desired that the final regulation address this. Should you have questions on how to allocate forfeiture account amounts, please reach out to a KerberRose Trusted Advisor.