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Employers managing 401(k) assets forfeited by former employees are encountering a surge in lawsuits. These litigations claim misuse of plan funds and highlight judicial disagreements regarding the legitimacy of these practices. The central issue is whether plan sponsors can use forfeited funds to cover their own contributions rather than offsetting costs for current employees.
Legal Precedents and Court Rulings
Recent cases illustrate the legal ambiguities. HP Inc. successfully defended its use of forfeited 401(k) assets to fund its plan contributions. A US District Court for the Northern District of California judge ruled on June 17 that this practice aligns with the Employee Retirement Income Security Act (ERISA). Conversely, in May, a judge in the Southern District of California required Qualcomm Inc. to justify its use of forfeited 401(k) assets, suggesting the company prioritized its financial interests over its employees.
Judicial Discrepancies and Broader Implications
The contrasting decisions from different courts underscore a broader uncertainty, leading to similar lawsuits against other major employers like Wells Fargo & Co., Tetra Tech Inc., and Honeywell International Inc. Caroline Wong, a senior managing associate at Sidley Austin LLP, noted that these cases challenge practices generally accepted under federal regulations, creating unexpected legal challenges for plan sponsors.
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Treasury Regulations and Employer Practices
Under current and proposed Treasury regulations, plan sponsors are permitted to use forfeited funds for administrative expenses or to offset their contributions. The decision against HP highlighted that these actions do not constitute prohibited transactions under ERISA. However, Qualcomm’s defense emphasized that the existing regulations allow such uses of forfeited assets without breaching fiduciary duties.
Impact on 401(k) Plan Administration
401(k) plans often include provisions that allow forfeited funds to cover administrative expenses or employer contributions. A 1963 Treasury regulation mandates the use of forfeited assets to reduce employer contributions. A proposed IRS rule from February 2023 aims to clarify that plan sponsors can use these assets for various purposes, aligning with the plan’s terms. This rule, if finalized, could bolster the defense against litigation concerning forfeited funds.
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Department of Labor’s Role
The Department of Labor (DOL) typically enforces fiduciary standards under ERISA but has remained relatively quiet on the issue of asset forfeitures, aside from advisory opinions. However, past DOL actions, such as the lawsuit against Sypris Solutions Inc. in 2017, show the agency’s potential involvement. In that case, the employer was ordered to compensate participants and pay penalties for misusing forfeited funds.
Legal Interpretations and Future Outlook
The divergent court rulings raise questions about ERISA’s fiduciary standards. According to Christine Cushman, counsel at Bricker Graydon LLP, the key issue is whether employers adhere to their plan documents. If plan documents permit the use of forfeited funds for specific purposes, arguing a fiduciary breach becomes challenging. Ensuring compliance with plan provisions is essential to avoid litigation risks.
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