PLANSPONSOR - July - August 2023 - 38

FIDUCIARY FORUM
Use It or Use It
The proposed regulations on FSA forfeitures
W
hile health flexible
spending
accounts are subject to a
" use it or lose it " rule, forfeiture
accounts in a qualified defined contribution
plan also must be used and in
a timely fashion! The Internal Revenue
Service has generally taken the position
that unallocated accounts-e.g., forfeitures-must
be used by the end of the
year in which they arose or shortly thereafter.
Earlier this year, that agency and
the Department of the Treasury issued
proposed regulations to formalize this
requirement and provide a hard and fast
deadline for satisfying it.
The proposed rule provides that, for
qualified defined contribution plans, a
forfeiture must be used within 12 months
following the end of the plan year in which
it occurred or an operational qualification
failure results. If adopted, the proposed
rule will be effective for plan years beginning
on or after January 1, 2024. For transition
purposes, the rule provides that
forfeitures occurring during a plan year
that begins before that date will be treated
as having occurred next year. This means,
for a calendar year plan, any forfeitures
existing this December 31 will need to be
used by December 31, 2025.
Plan committees should be
reviewing their current forfeiture balance
and ensuring they have a process in place
to use the funds within this time frame.
The proposed regulation also
confirms the types of expenses for which
forfeitures may be used. While not a
surprising list, the regulations specifically
provide for paying plan administrative
expenses, reducing employer contributions
and increasing benefits in other
participants' accounts. Of course, that
assumes the plan terms do not prohibit or
limit forfeitures' use. We occasionally see
a plan that limits the applications or that
lists a hierarchy for them. This can result
in improper use of plan assets and result
in an operational error or fiduciary breach.
Plan committees
should be
reviewing their
current forfeiture
balance and
ensuring they
have a process in
place to use the
funds within this
time frame.
In order to avoid an impermissible
use of forfeitures, and potential qualification
and fiduciary issues, plan committees
should review plan terms and consider a
provision that allows for the broad use of
this money for any permitted purpose.
How the forfeitures get employed
may be a fiduciary decision, and, when
the use is to pay for plan administrative
expenses, the committee, importantly,
must confirm that those are eligible plan
expenses. A key question is whether the
expense is for plan or settlor purposes.
Settlor expenses, such as considering and
adopting discretionary plan amendments,
are not deemed to be plan administrative
expenses and may not be paid with
forfeitures or otherwise charged to the
plan. On the other hand, once an amendment
is adopted, updating the summary
plan description or preparing participant
communications about the amendment
are considered plan administrative
expenses and may be paid by the plan-
including with forfeitures.
A footnote in the proposed regulations'
preamble includes a reminder
regarding documenting the use of forfeitures:
" 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 " (emphasis added).
We have seen the Department of Labor
review whether administrative expenses
paid by the plan were permissible-
whether from forfeitures or charged to
participants-and now it appears
the
IRS may be reviewing this information
as well. It may not be enough to
have
good processes
and administer
accounts correctly; you may be required
to prove that you have used forfeitures
for permitted purposes by the deadline.
In light of the proposed rule, plan
committees should review their forfeiture
accounts and processes to make
sure these are: 1) using forfeitures for
proper purposes; 2) using the funds by
the new proposed deadline rather than
letting them accumulate indefinitely; and
3) retaining records providing that 1) and
2) have been met.
Summer Conley is a partner in the Los Angeles office of Faegre Drinker Biddle &
Reath LLP. Michael Rosenbaum is a partner in the firm's Chicago office. Heather
Bader, also a partner in Los Angeles, contributed to this column.
38 PLANSPONSOR.COM July - August 2023 Art by Joseph Ciardiello
http://www.PLANSPONSOR.COM
PLANSPONSOR - July - August 2023

Table of Contents for the Digital Edition of PLANSPONSOR - July - August 2023
