When does a forfeiture occur in a defunded contribution plan?

In a defined contribution plan, a forfeiture occurs when a participant terminates employment and has not met the necessary vesting requirements for their employer contributions. Specifically, a forfeiture is typically recognized after an employee has at least five consecutive one-year breaks in service or when the vested balance of their account is distributed.

Choosing the first condition—five one-year breaks—reflects the rules established under ERISA, which detail how long a participant must be out of service before their non-vested balance is forfeited. Additionally, the distribution of vested accounts can also initiate a forfeiture of any non-vested amounts, as it eliminates the participant's entitlement to those funds.

It's important to understand that the requirement of five breaks links back to the concept of vesting schedules, which determine how much of the employer's contributions a participant can keep based on their length of service. This is a cornerstone of defined contribution plans, impacting the financial decisions of both employees and employers.

Other options presented do not align with this understanding. For instance, termination of employment alone does not immediately result in a forfeiture if the participant still has vested amounts. Similarly, reaching retirement age does not automatically lead to a forfeiture, as vested balances can usually be retained until