While the use of 401(k) plan forfeitures to offset employer contributions has been a longstanding practice permitted by U.S regulators, recent litigation scrutinizing plan fiduciaries’ use of forfeitures under the Employee Retirement Income Security Act continues both to be filed and to progress in courts.
In recent weeks, a new class action complaint was filed, and two existing lawsuits survived district court challenges by the defendant companies.
Bank of America
On August 9, Bank of America Corp. was the latest company to be hit with a class action lawsuit alleging use of forfeited plan money for its own gain.
Esmerelda Becerra, a participant in the Bank of America 401(k) Plan and represented by Haffner Law PC, filed a lawsuit against the company’s retirement plan committee in U.S. District Court for the Central District of California, alleging the plan committee used forfeited plan assets to reduce its employer contribution obligations, rather than for the benefit of plan participants, therefore violating ERISA.
According to the complaint, Becerra v. Bank of America Corp., participants in the plan immediately vest in their own contributions and receive a matching employer contribution after three years of service. As a result, participants who leave the company before they are fully vested forfeit the employer contributions they would have otherwise received.
Becerra claims that in using those forfeited fund assets toward future employer contributions, Bank of America “harmed the plan and participants in the plan, including by reducing plan assets and not allocating forfeited funds to participants’ accounts.”
The complaint further accuses Bank of America of breaching its fiduciary duty of prudence by failing to “engage in a reasoned and impartial decision making process in deciding to use the forfeited funds in the plan to reduce the company’s own contribution expenses.”
According to the IRS, which reaffirmed its position in 2023, 401(k) plan forfeitures can be used for any of three permitted purposes: to pay plan expenses, to reduce future employer contributions or to make an additional allocation to participants.
Intuit Inc.
In a separate case against software company Intuit Inc., the U.S. District Court for the Northern District of California granted a former employee, Deborah Rodriguez, represented by Hayes Pawlenko LLP, the right to advance her case against the company over claims that the firm reallocated forfeited funds for its own benefit, to the “detriment of the plan and its participants.”
Rodriguez v. Intuit Inc. was first filed on October 2, 2023, and Intuit moved to dismiss the lawsuit on December 18, 2023. On Monday, the district court granted Intuit’s motion to dismiss for failure to monitor fiduciaries, which it ruled it had done, but denied Intuit’s other arguments for dismissal.
The initial complaint cited an example from 2021, when Intuit allocated $74,000 of forfeited funds to pay plan expenses totaling $975,000 that year, leaving a balance of approximately $140,000 in the forfeited account.
U.S. District Judge P. Casey Pitts ruled that the lawsuit validly alleges that Intuit breached its fiduciary duties of loyalty and prudence under ERISA and that Rodriguez pleaded sufficient facts to support her claim that “the plan as a whole was damaged.”
Pitts also ruled that Rodriguez provided a plausible interpretation of Intuit’s plan document as prohibiting the use of forfeitures to offset anything other than Intuit’s safe harbor matching contributions and profit-sharing contributions.
Additionally, Intuit argued in its motion to dismiss that Rodriguez failed to allege that Intuit acted as a fiduciary, arguing instead that it functioned as a settlor and that the company’s decision to offset matching contributions with forfeitures is “fundamentally a decision regarding how much Intuit will contribute to the plan” and thus a settlor function. Pitts ruled that this argument lacked merit.
“Although Intuit’s decision about how to allocate those plan assets undoubtedly [a]ffected the amount it would contribute as settlor each year, by the plan’s own terms it was making decisions about the management and disposition of plan assets,” Pitts ruled. “As such, it acted in a fiduciary capacity when making those decisions.”
Carol Buckmann, founder, partner and ERISA attorney at Cohen & Buckmann P.C., had previously said that the issue of forfeitures is not a fiduciary decision, as it is longstanding ERISA policy that decisions on plan design, how to fund a plan and the level of contributions are “settlor decisions” and are not fiduciary in nature.
Qualcomm Inc.
Finally, U.S. District Judge Roger T. Benitez in U.S. District Court for the Southern District of California denied Qualcomm Inc.’s motion to reconsider a lawsuit filed against the company by a plan participant in October 2023, also alleging that the company chose to use forfeited funds for its own benefit by reducing employer contributions.
The participant, Antonio Perez-Cruet, is also represented by Hayes Pawlenko LLP in Perez-Cruet v. Qualcomm Inc. et al.
Qualcomm argued the court should reconsider the case primarily because the IRS regulation “should be understood to shield [their] decision as plan fiduciaries from ERISA liability.”
Benitez stated that a motion for reconsideration cannot be granted unless the court is presented with newly discovered evidence, committed clear error or if there is an intervening change in the controlling law. As Qualcomm merely reiterated arguments made in its prior motion to dismiss, Benitez denied the request for reconsideration.
According to analysis by ERISA attorney Buckmann, the Department of Labor has never objected to the longstanding IRS position on plan forfeitures, but it is important that plan sponsors authorize the use of forfeitures in their plan’s language.
