How can a 401(k) plan use forfeitures?
Last updated October 2, 2026
Forfeitures — nonvested employer contributions left behind by departing employees — must be used as the plan document directs — typically to pay reasonable plan expenses, reduce future employer contributions, or be reallocated to participants, and generally within the year they arise or the following year.
When a partially vested participant leaves, the nonvested slice of employer money is forfeited into a plan-level account. What happens next isn't discretionary — the plan document specifies the permitted uses, ordinarily some combination of:
- Paying reasonable plan administrative expenses
- Offsetting future employer contributions
- Reallocating to remaining participants
Two rules generate the audit findings: forfeitures shouldn't accumulate indefinitely (regulators expect use by the end of the year following the forfeiture year), and the use must match the document. Letting a forfeiture account balloon unspent — or using it contrary to the document's ordering — has featured in both IRS audits and a recent wave of fiduciary litigation. Review the balance annually and record the disposition in committee minutes.
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