Definition
Forfeitable refers to benefits in a pension or profit-sharing plan that a participant does not own until they meet certain length-of-service or performance criteria. If these criteria are not met, the benefits can be forfeited, meaning the employee loses the rights to those benefits.
Examples
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Pension Plan:
- An employee must work for a company for ten years to be fully vested in the pension plan. If the employee leaves after seven years, they forfeit any unvested benefits.
-
Profit-Sharing Plan:
- A company’s profit-sharing plan stipulates that employees must achieve five years of service for full vesting. An employee who leaves the company after three years would forfeit the contributions made by the company.
Frequently Asked Questions (FAQs)
What does forfeiting benefits mean?
Forfeiting benefits means losing the right to benefits in a pension or profit-sharing plan because the required vesting criteria were not met.
How does vesting work?
Vesting is the process by which an employee earns the right to keep company-provided benefits. It often involves meeting specific service or performance milestones.
Can forfeited benefits be reclaimed?
Typically, once benefits are forfeited, they cannot be reclaimed. However, policies can vary depending on the employer and the terms of the plan.
What triggers the forfeiture of benefits?
Common triggers include failing to meet the prescribed length of service or not achieving required performance targets.
Are all types of retirement plans subject to forfeiture?
No, not all retirement plans are subject to forfeiture. For example, benefits from individual retirement accounts (IRAs) generally cannot be forfeited once vested.
Vesting
Vesting refers to the process through which an employee earns the rights to benefits in a retirement plan over time.
Profit-sharing Plan
A profit-sharing plan is a retirement plan that allows employers to share some of their profits with employees, typically through contributions that are made to individual accounts.
Pension Plan
A pension plan is a type of retirement plan where an employer makes contributions to a pool of funds set aside for an employee’s future benefit.
Online References
Suggested Books for Further Studies
- “Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches” by Allen Reuther
- “Pension Fund Economics and Finance: Efficiency, Risk and Agency Issues” by Rober Clark
- “The Vesting and Forfeiture of Benefits in Pension Plans” by Robert S. Kaplan
Fundamentals of Forfeitable: Retirement Plans Basics Quiz
### What happens when an employee leaves a company before meeting the vesting criteria for a pension plan?
- [x] The employee forfeits any unvested benefits.
- [ ] The employee keeps all benefits regardless of vesting.
- [ ] The employee receives a prorated amount.
- [ ] The benefits are transferred to the employee’s new company.
> **Explanation:** If an employee leaves the company before satisfying the vesting criteria for a pension plan, any unvested benefits are forfeited.
### In a profit-sharing plan, what is typically required for an employee to become fully vested?
- [ ] Ownership of stock options
- [x] Specific length-of-service requirements
- [ ] Adherence to a performance improvement plan
- [ ] Completion of mandatory training sessions
> **Explanation:** In a profit-sharing plan, an employee usually needs to meet specific length-of-service requirements to become fully vested in the benefits.
### What does the term "vested" mean in the context of retirement plans?
- [ ] It refers to the maturity of a bond.
- [x] It refers to the amount of benefit ownership the employee has earned.
- [ ] It indicates the initiation of a savings account.
- [ ] It involves the selling of vested stocks.
> **Explanation:** "Vested" refers to the portion of benefits in a retirement plan that an employee owns and has earned the right to keep.
### Are forfeitable benefits common in all types of pension plans?
- [ ] Yes, without exception
- [ ] No, they are very rare
- [x] No, it depends on the specific type of pension plan
- [ ] Yes, but only in government plans
> **Explanation:** Whether benefits are forfeitable varies by the type of pension plan as well as the terms and conditions set by the employer and plan itself.
### Which type of plan typically uses performance criteria as part of the vesting schedule?
- [x] Profit-sharing Plan
- [ ] Individual Retirement Account (IRA)
- [ ] Health Savings Account (HSA)
- [ ] 529 Plan
> **Explanation:** Profit-sharing plans often include performance criteria as part of their vesting schedule, where meeting specific targets may impact benefits.
### What generally happens to forfeited benefits?
- [x] They remain with the company.
- [ ] They are distributed among remaining employees.
- [ ] They are given to a charity.
- [ ] They roll over to another retirement account.
> **Explanation:** Forfeited benefits typically remain with the company and are not transferred or distributed among employees or external entities.
### What is a typical vesting period for a profit-sharing plan?
- [ ] 1 year
- [x] 3-5 years
- [ ] 10 years
- [ ] 25 years
> **Explanation:** A typical vesting period for a profit-sharing plan ranges from 3 to 5 years, though exact periods can vary.
### Can an employee who meets the performance requirements but not the length-of-service criteria forfeit benefits?
- [x] Yes
- [ ] No
- [ ] Sometimes
- [ ] It depends on state laws.
> **Explanation:** Yes, an employee can forfeit benefits if they meet performance requirements but do not fulfill the length-of-service criteria.
### What does "forfeitable" mean in the context of employee benefits?
- [ ] Benefits are tax-free.
- [ ] Benefits are eligible for yearly rollovers.
- [x] Benefits can be lost if vesting criteria are not met.
- [ ] Benefits are secured irrespective of duration of service.
> **Explanation:** "Forfeitable" means that the benefits can be lost or forfeited if specific vesting criteria such as length-of-service or performance requirements are not met.
### In which situation would a benefit not be forfeitable?
- [ ] When the employee resigns
- [ ] During a company merger
- [x] When the employee is fully vested
- [ ] When the plan is terminated
> **Explanation:** Benefits are not forfeitable once an employee is fully vested, meaning they have met the criteria to own the benefits outright.
Thank you for exploring the concept of forfeitable benefits in pension and profit-sharing plans. We hope you find this information and the quiz helpful for your financial literacy journey.
