Forfeiture dollars are to be allocated annually in accordance with your plan document’s direction.
Typically forfeitures can be used to pay allowable and reasonable plan expenses and/or to offset employer contributions. If dollars remain they should be allocated back to participants in the year for which they are accrued (again, as directed in the plan document).
The issue with not allocating forfeitures for the year they are accrued (or shortly thereafter), is that they are considered to be the property of the participants existing in the year(s) of accrual. The remedy for carrying multi-year forfeitures is voluntary compliance with the IRS. An attorney should be able to help with the application and direction. Aside from any fees/penalties the IRS may levy, plus the cost of the Voluntary Correction Program (VCP), there will be the issue of identifying and finding participants in each year affected, so forfeitures can be properly distributed to those that are entitled to them.
The accounts of lost participants may be forfeited after a reasonable effort is made to locate the participant. This must be authorized by the plan document. Such amounts may be added to the plan’s forfeiture account and used in the same manner as other forfeitures. However, if the participant reappears the account must be restored.
What constitutes as a reasonable effort to find missing participants depends on the facts and circumstances. Recent DOL guidance on tracking down participants where a plan is terminated indicates the following:
• Notify participant by certified or electronic email (DOL has a model notice);
• Review plan records;
• Contact designated beneficiary;
• Use free online search tools; and
• Size of account may be considered in deciding how much effort is required.
Note that IRS and SSA letter forwarding programs are no longer available.