Is Your Company Overlooking "Hidden Treasure" Inside It's 401(k) Plan?

Most companies with more than a handful of employees offer a 401(k) savings plan in order to attract and retain workers. Many of these companies also provide a matching contribution so that when an employee elects to defer part of his or her wages into the 401(k) plan, the employer will make an additional contribution to the employee's account. In addition to matching contributions, the company may also be paying (directly or indirectly) for other costs to administer the 401(k) plan.

This can be a pretty costly proposition for an employer. I talk frequently with business owners, tax directors, and human resource personnel about their 401(k) plans and they are all trying to save costs. Frequently, they are unaware of funds available to them in the 401(k) plan itself that can be used to save money for the company. This article explains how this can happen and what employers can do to find this "hidden treasure."

In order to induce employees to stay with the company, most employers which have a matching contribution formula will provide a vesting schedule. Under this schedule, if the employee terminates employment too soon, he or she will forfeit some or all of the matching contribution made by the company. The tax rules set limits on the length of vesting schedules with most employers using a schedule that provides for incremental vesting over a period of 6 years.

Of course, not all employees will stay with the company until they are 100% vested. After termination, the former employee will forfeit the unvested portion of his or her account usually at the time they receive the rest of their vested account. For employees who are zero vested at the time of termination, their forfeiture can occur immediately. Money that is forfeited is required by law to remain inside the 401(k) plan and is part of all the other assets held by the plan's trustee.

Unfortunately, many of the vendors who provide administrative services for employers fail to inform the employer of the existence of these forfeited funds. Often, company personnel do not realize that the forfeitures represent "hidden treasure" to the company. It is not always easy for an employer to spot the extra forfeiture cash because this money is usually lumped in with other liquid investments held by the plan, such as its money market account. Tracing forfeiture records with the vendor is usually required to determine the amount of funds that may be available. Once this money is found, the employer can use it to pay for its current matching contributions and this will free up current cash flow to be used for other business purposes.

Some 401(k) plan vendors may inform the employer of the forfeited funds but have provided in the governing documents of the plan that such funds are to be used to pay for the operating costs of the plan. While this is perfectly lawful, it still means that the employer is effectively paying for these costs because it is not using the forfeitures to lower its current contributions to the plan. If the plan document is amended, then the costs of plan administration may instead be charged to the participants with the forfeitures being used to fund some or all of the employer's current matching contributions.

So, the moral of this story is don't stop looking for that pot of gold at the end of the rainbow. It may be a close as a simple amendment to your plan document.

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