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 Internal Revenue Service 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 that 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 that forfeitures may be used in one of three ways:

  • Pay reasonable plan expenses such as recordkeeping fees,

  • Reduce employer contributions, or

  • Allocate to participants’ accounts.

• A revenue credit account exists where plan investments generate revenue credits to cover the cost of record keeping that exceed the record keeper’s fee. In this circumstance, the recordkeeper allocates the excess to a revenue credit account.

• It has been the general understanding that the balance in revenue credit accounts may be used in the same manner as the balance in forfeiture accounts, with the exception that 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 that 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 Internal Revenue Service confirmed this in a newsletter issued in 2010 stating that the balance in forfeiture accounts should be allocated by the end of the plan year in which the forfeitures occur. However, the Internal Revenue Service has never made a serious effort to enforce this rule and plan sponsors often allowed the balances in forfeiture and revenue credit accounts to grow year over the year.

• The proposed regulation confirms the general understanding that these amounts should not remain unallocated indefinitely. With regards to timing, the proposed regulation requires that 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 that 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 Internal Revenue Service may step up its enforcement efforts.

• Although this guidance does not mention revenue credit accounts, it may be arguable that similar timing could apply to their usage in similar fashion as forfeiture accounts. It is desired that the final regulation address this.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. The material presented was created by RPAG. Securities, investment advisory, and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC (www.sipc.com). Supervisory Office: 16 Campus Blvd, Newtown Square, PA 19073. Cadence Financial Management, LLC is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. ACR# 5802689 07/23