What is a required use of forfeitures in a qualified plan?

In the context of qualified retirement plans, particularly 401(k) plans, forfeitures refer to amounts that are deducted from an employee’s account when they leave the company before becoming fully vested. These forfeited amounts can only be used in specific ways as dictated by the plan’s rules and the Internal Revenue Service regulations.

Using forfeitures to pay reasonable plan expenses is a required use because it helps ensure the administrative costs of maintaining the retirement plan are covered without unnecessarily burdening the employees or the plan itself. This use is beneficial as it can help keep the plan operational and compliant with regulatory standards. It also supports the overall effectiveness of the retirement plan by ensuring that expenses do not detract from the benefits provided to participants.

Other options, like providing bonuses or retaining the forfeitures solely by the employer, do not align with the regulations governing how forfeitures must be managed in a qualified plan. While increasing future contributions is a possible use of forfeitures, it is not mandated, unlike covering reasonable plan expenses, which is an allowable and appropriate application that supports the integrity and functionality of the plan.