Can Forfeitures Be Used for a One-Time Discretionary Contribution?

“We are a private tax-exempt university that suspended its 403(b) discretionary contribution during the pandemic. We have since resumed the contribution, and as things are looking a bit better this year from a financial perspective, we wanted to make an additional one-time discretionary contribution to the plan to make up for some of the contributions our employees missed out on. Also, due to the pandemic, we have a larger amount of forfeitures than usual. Can we use these forfeitures to fund some of this additional one-time contribution?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

The Experts answer to this question will be a familiar one to frequent readers of this column; namely, it depends on what the plan document says!

Plan sponsors can generally use forfeitures to pay allowable plan expenses or offset (reduce) employer contributions to the plan (or, in your case, fund all/part of an additional employer contribution to the plan). However, for forfeitures to be used for any of these purposes, your plan document must contain specific language that allows it. Many documents do permit the use of forfeitures for all these purposes, but some do not. Thus, before proceeding, you should confirm that the necessary language is present in your plan document; otherwise, a plan amendment may be necessary.

And, of course, if there is any doubt as to whether your plan document language specifically permits the use of forfeitures to fund your additional employer contribution, you should contact the drafter of the document to confirm. In addition, the decision to offer this additional contribution should be documented, for example, in board meeting minutes.

One final note: Since you are a private university subject to nondiscrimination testing, you should make certain that the additional contribution does not discriminate in favor of highly compensated employees in a manner that would cause your nondiscrimination testing to fail. The best way to ensure this is to allocate the same percentage or dollar amount to all eligible employees. Also, you’ll want to keep in mind that the additional employer contribution will count toward the Internal Revenue Code Section 415 combined limit on total employer and employee contributions on behalf of a participant as well.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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