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Forests overlap with large parts of the northern hemisphere permafrost area, and representing canopy processes is therefore crucial for simulating thermal and hydrological conditions in these regions. Forests impact permafrost through the modulation of radiative fluxes and exchange of turbulent fluxes, precipitation interception and regulation of transpiration. Forests also feature distinct soil layers of litter and organic matter, which play central roles for the infiltration and evaporation of water, while also providing thermal insulation for deeper ground layers. In this study, we present a new module within the CryoGrid community model to simulate forest ecosystems and their impact on the surface water and energy balance. The module includes a big‐leaf vegetation scheme with adaptations for canopy heat storage and transpiration. Furthermore, we account for the effect of surface litter layers on water and energy transfer. We show that the model is capable of simulating radiation, snow cover and ground temperatures below a deciduous needleleaf forest on a north‐facing slope in the Khentii Mountains in Central Mongolia. A sensitivity analysis of topographic aspect and ecosystem configuration confirms the important role of the litter layers for the energy and water balance of the ground. Furthermore, it suggests that the presence of permafrost is primarily linked to topographic aspect rather than the presence of forest at this site. The presented model scheme can be used to study the development of the ground thermal regime in forests, including the state of permafrost, under different climate, ecosystem, and land use scenarios. Plain Language Summary: Large parts of the permafrost in the Northern Hemisphere are covered by forest, which impact the transfer of water and energy between the atmosphere and the ground. In this study we include single‐layer vegetation scheme in an established permafrost model, and test this for a site in Mongolia at the southern limit of Eurasian permafrost and boreal forest. We find that forest soils have smaller variations in ground temperature than on the nearby steppe, and that surface litter layers provide substantial insulation and soil water retention. Our simulations also suggest that the local distribution of permafrost in our study area is linked to topography rather than forest cover. The vegetation scheme is based on a global land surface model and represents a new modeling tool that readily can be used for further studies of permafrost‐ecosystem interactions. Key Points: Novel developments in the CryoGrid Community Model reproduce how forests dampen the seasonal ground surface temperature signalSurface litter layers are essential for forest ground hydrothermal regime as they provide thermal insulation and retain soil moisturePermafrost in our simulations is confined to north‐facing slopes in the study region regardless of ecosystem setup [ABSTRACT FROM AUTHOR]