[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.401-7]

[Page 25-26]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.401-7  Forfeitures under a qualified pension plan.

    (a) General rules. In the case of a trust forming a part of a 
qualified pension plan, the plan must expressly provide that forfeitures 
arising from severance of employment, death, or for any other reason, 
must not be applied to increase the benefits any employee would 
otherwise receive under the plan at any time prior to the termination of 
the plan or the complete discontinuance of employer contributions 
thereunder. The amounts so forfeited must be used as soon as possible to 
reduce the employer's contributions under the plan. However, a qualified 
pension plan may anticipate the effect of forfeitures in determining the 
costs under the plan. Furthermore, a qualified plan will not be 
disqualified merely because a determination of the amount of forfeitures 
under the plan is made only once during each taxable year of the 
employer.
    (b) Examples. The rules of paragraph (a) of this section may be 
illustrated by the following examples:

    Example (1). The B Company Pension Trust forms a part of a pension 
plan which is funded by individual level annual premium annuity 
contracts. The plan requires ten years of service prior to obtaining a 
vested right to benefits under the plan. One of the company's employees 
resigns his position after two years of service. The insurance company 
paid to the trustees the cash surrender value of the contract--$750. The 
B Company must reduce its next contribution to the pension trust by this 
amount.

[[Page 26]]

    Example (2). The C Corporation's trusteed pension plan has been in 
existence for 20 years. It is funded by individual contracts issued by 
an insurance company, and the premiums thereunder are paid annually. 
Under such plan, the annual premium accrued for the year 1966 is due and 
is paid on January 2, 1966, and on July 1 of the same year the plan is 
terminated due to the liquidation of the employer. Some forfeitures were 
incurred and collected by the trustee with respect to those participants 
whose employment terminated between January 2 and July 1. The plan 
provides that the amount of such forfeitures is to be applied to provide 
additional annuity benefits for the remaining employees covered by the 
plan. The pension plan of the C Corporation satisfies the provisions of 
section 401(a)(8). Although forfeitures are used to increase benefits in 
this case, this use of forfeitures is permissible since no further 
contributions will be made under the plan.

    (c) Effective date. This section applies to taxable years of a 
qualified plan commencing after September 30, 1963. However, a plan 
which is qualified on September 30, 1963, will not be disqualified 
merely because it does not expressly include the provisions prescribed 
by this section.

[T.D. 6675, 28 FR 10121, Sept. 17, 1963]