[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 [www.gpo.gov]
[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 www.regulations.gov (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or withdrawn.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 
[email protected].

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\ www.irs.gov/pub/irs-pdf/p4278.pdf.
    \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:
     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
     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 
www.regulations.gov 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