Forfeiture Funds and Fiduciary Duty: A Collision Course

One of the most core principles of ERSIA is that fiduciaries must always act in the best interest of their participants. Every decision must be made with the participant’s interest in mind, and it is a prohibited transaction if a fiduciary makes a decision that would be deemed not to be in the best interest of the participants. This is often referred to as the “Duty of Loyalty.”

Recent lawsuits involving the use of 401(k) forfeiture funds are bringing new questions about this key issue in ERISA fiduciary law. They are challenging whether plan fiduciaries acted appropriately when using forfeiture funds to offset employer matching contributions, rather than prioritizing plan expenses or reallocating the funds to participants’ accounts.

These suits are challenging whether fiduciaries can rely solely on plan documents or IRS allowances when making forfeiture allocation decisions. Plan Sponsors argue they are following IRS guidance, while plaintiffs contend that such practices are inconsistent with ERISA’s clearly laid out fiduciary obligations, which would supersede IRS guidance. Courts are now tasked with determining whether the fiduciaries’ actions align with their obligations under ERISA or if the decisions improperly served employers’ financial interests.

Use of Forfeiture Funds

Forfeitures occur when employees leave before becoming fully vested in their employer’s contributions. IRS regulations allow forfeitures to be used for three purposes:

(1) to pay plan expenses,

(2) to reduce employer contributions, or

(3) to allocate additional funds to participants.

Although the IRS has always allowed forfeitures to be used for any of the above, plaintiffs are now arguing that using forfeitures to fund employer matching contributions breaches ERISA’s fiduciary duties of loyalty and prudence. They allege that the companies made this decision in order to save the company money (not because it was in the best interest of the participants). They argue that this decision saved the company money (by reducing the amount they had to pay in order to fund the match) and that therefore the company benefited but the participants did not.

Current Notable Court Cases

The initial wave of notable lawsuits raising these issues include the cases below. Of interesting note, initial rulings have landed on both sides of the issue:

1. Perez-Cruet v. Qualcomm Inc. (Case No. 3:23-cv-01890, S.D. Cal.)
   Qualcomm is accused of using over $1.2 million in forfeitures annually to offset its matching contributions. In July (2024), the court denied Qualcomm’s motion to dismiss, allowing the claims to proceed.
2. Hutchins v. HP Inc. (Case No. 23-cv-5875, N.D. Cal.)
   Plaintiffs argued HP misused forfeitures to reduce its own contributions instead of covering administrative expenses. In August (2024), the court dismissed the claims, finding HP’s actions aligned with IRS guidance​.
3. Rodriguez v. Intuit Inc. (Case No. pending, N.D. Cal.)
   The lawsuit challenges Intuit’s reallocation of forfeitures to reduce its contributions rather than benefiting participants. In August (2024), the court rejected Intuit’s argument that the decisions were purely “settlor” functions, ruling that fiduciary duties still apply​.
4. Becerra v. Bank of America (Case details pending)
   In a newer suit, Bank of America is accused of breaching its fiduciary duty by using forfeited funds to reduce its matching obligations rather than reallocating them to participants or covering plan costs. Plaintiffs are arguing that this harmed participants by reducing overall plan assets. Undoubtedly, Bank of America will try to have the lawsuit dismissed, as the other three companies have.​

Summary

The central argument across this new wave of litigation is that fiduciary responsibility under ERISA demands that plan fiduciaries prioritize participants’ interests over the interests of the company. The plaintiffs are alleging that using forfeiture funds to lower employer costs fails to meet this standard, even if is permitted under IRS regulations. As different courts weigh these arguments, the outcomes could set important precedents for how plan sponsors handle forfeiture funds in the future.

The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. You should not act or refrain from acting based on any content included without seeking legal or other professional advice. The content contains general information and may not reflect current legal developments or address your situation. 

Written by Michael Davis

Michael Davis has been in the retirement plan industry since 1994 and is the Vice President of Sales at CRS. Michael can be reached via email at .