Definition
Nonforfeitable benefits are a legally protected component of pension or profit-sharing plans. These benefits are irrevocable regardless of how long an employee stays with the company or any future job performance. Once these benefits are granted, they cannot be lost or forfeited, ensuring that the employee will receive them upon retirement or another qualifying event.
Examples
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Vested Pension Plans: An employee’s pension benefits that have met all vesting requirements become nonforfeitable. For example, after five years of service, an employee may secure a fully vested pension, which cannot be taken away even if they leave the company before retirement age.
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Profit-Sharing Contributions: If a company’s profit-sharing plan has immediate vesting, any contributions made to an employee’s account are nonforfeitable from the moment they are deposited.
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401(k) Matching Contributions: Suppose a company has a vesting schedule for its 401(k) match. If the employee completes the required service period per the schedule, the employer’s matching contributions become nonforfeitable.
Frequently Asked Questions (FAQs)
What does nonforfeitable mean in simple terms?
Nonforfeitable means that the benefits are guaranteed and cannot be lost or taken back once they have been earned by the employee.
How does nonforfeitability differ from vesting?
Nonforfeitability refers to benefits that cannot be forfeited, while vesting is the process through which benefits become nonforfeitable after certain conditions, like length of service, are met.
Are nonforfeitable benefits always immediately available to the employee?
Not necessarily. Although nonforfeitable benefits are guaranteed, their actual payout often occurs at a later date, such as retirement.
Can nonforfeitable benefits be reversed if the company faces financial difficulties?
No, once benefits are designated as nonforfeitable, they are protected by law and cannot be taken back even if the company faces financial issues.
Do all employees automatically get nonforfeitable benefits?
No, benefits become nonforfeitable based on the specific terms and conditions of the pension or profit-sharing plan, usually after meeting vesting requirements.
Related Terms with Definitions
- Vesting: The process by which an employee earns the right to keep the employer-provided benefits, regardless of continued employment.
- Cliff Vesting: A type of vesting schedule where the employee becomes fully vested all at once after a specified period.
- Incremental Vesting: Also known as graded vesting, where the employee earns portions of the benefits over time, eventually becoming fully vested.
- Defined Benefit Plan: A pension plan in which an employer promises a specified pension payment upon retirement, which is nonforfeitable after vesting.
- Defined Contribution Plan: A retirement plan in which the employee and/or employer contribute to an individual account, with benefits based on the amount of contributions and investment returns.
Online Resources
- IRS on Vesting
- U.S. Department of Labor - Understanding Retirement Plan Fees
- Investopedia - Understanding Vesting
Suggested Books for Further Studies
- The Pension Answer Book by Stephen J. Krass
- ERISA: A Comprehensive Guide by Ferenczy and Koenig
- Fundamentals of Private Pensions by Dan Mays McGill
Fundamentals of Nonforfeitable Benefits: Management Basics Quiz
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