With all that is going on in the world and impacting your businesses, we will keep this update short. With links to information that we believe is helpful and timely. We hope you and your business are weathering this storm.
We are here to assist NEFI membership in any capacity. Please do not hesitate to reach out anytime.
Vesting and Forfeitures
In our last article, we highlighted two recent conversations with NEFI members who had existing plans that no longer met their personal and company needs. We discussed two plan types (Profit Share and Safe Harbor) that would meet the business owner’s needs.
This issue we are going to explain vesting schedules and what happens when an employee leaves the company with unvested money in the plan, also known as a forfeiture.
What is a vesting schedule?
Employer-sponsored qualified plans that involve employer contributions to employee accounts allow employers to create vesting schedules. Vesting schedules require employees to meet specific criteria, typically years of employment for the employee to receive the full benefit of employer contributions.
For example, XYZ Energy, Inc. offers a profit-sharing 401k with a 2-6 year graded vesting schedule.
|End of Year||Eligibility/Contribution||Vesting %|
|Year 1||Not eligible, one year needed||N/A|
|Year 2||Contribution made to plan||20%|
|Year 3||Contribution made to plan||40%|
|Year 4||Contribution made to plan||60%|
|Year 5||Contribution made to plan||80%|
|Year 6||Contribution made to plan||100%|
There are numerous options for length of vesting schedules, but typically they may extend as long as 6 or 7 years.
What are forfeitures?
Using the example above, Employee A has worked at XYZ Energy for three years, and now in year four, separates from service. In this example, Employee A would receive a distribution for 100% of their contributions and 40% of the profit-share. The other 60% is known as a forfeiture. That remains in the plan in a holding account. The plan document and adoption agreement would stipulate how forfeitures are used; typically, they would be applied to annual contributions for other employees or pay plan fees reducing employer costs in the year of forfeiture.
2020 is the year to ensure your employer retirement plan is the right plan for you, your family, and your business. While there are many more critical issues challenging business owners at the moment, we want to highlight features that might help your plan work better for you.
Vesting schedules can help to retain employees; forfeitures help keep more money in the business and lower costs if your company does experience higher turnover. They might seem like small adjustments, but they can make a big difference over time.
We hope everyone is staying safe and business is operating as well as it can in these uncertain times.