How is forfeiture calculated from an employee account?

Forfeiture is specifically related to the amounts in an employee's 401(k) account that the employee does not have a right to keep when they leave the company or otherwise become ineligible for those funds. This typically applies to employer contributions.

The correct answer is rooted in the fact that forfeiture is defined as the amount that is not vested when an employee terminates employment. Therefore, it encompasses the non-vested portions of employer contributions, such as matching contributions or non-elective contributions that have not been earned by the employee based on the vesting schedule. When an employee exits the plan before they have fully vested, the amounts that remain unvested are considered forfeitures.

Understanding this concept is crucial in administering a 401(k) plan, as these forfeited amounts may then be reallocated or used to offset plan expenses, thereby reducing the overall cost of the plan for remaining participants.