DOL Issues Brief Defending Employer Forfeiture Practices
The U.S. Department of Labor (DOL), along with a coalition of industry trade associations and business groups, on Wednesday filed an amicus brief supporting plan sponsors in a lawsuit targeting plan forfeiture practices.
The amicus brief urges the U.S. Court of Appeals for the Ninth Circuit to uphold a decision issued by the U.S. District Court for the Northern District of California in the case of Hutchins v. HP, Inc.
Paul Hutchins, a participant in HP’s 401(k) plan, alleged that from 2019 to 2023, the company wrongly used forfeited funds to satisfy their own matching contributions rather than use it to pay towards plan administrative fees. These forfeited funds include unvested employer contributions for when an employee leaves a company before fully vesting into the plan.
In applying this practice, Hutchins argued that HP violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA).
While the court ultimately dismissed the case last year, Hutchins filed an appeal to the U.S. 9th Circuit Court of Appeals. This appeal triggered a surge of class action lawsuits challenging the use of forfeitures in 401(k) and 403(b) plans.
In its brief, the DOL, joined by the ERISA Industry Committee (ERIC), defended the usage of forfeitures practices in these plans. The agency noted that forfeiture practices are allowed under the Internal Revenue Code (IRC) and Treasury regulations and have been permitted predating passage of ERISA.
While plaintiffs in forfeiture cases tend to argue that ERISA duties trump IRS guidelines, the DOL claims that isn’t so.
“The Plaintiffs’ bar cannot get what it wants from Congress, and it cannot get what it wants from the executive agencies, so it has invited the judicial branch to rewrite a half century of settled law relating to forfeitures,” the DOL stated.
The DOL further defended employers in its brief by touching on the impacts a successful appeal would have on future retirement plan litigation, adding that plan sponsors would “face a new and uncertain landscape where forfeitures can be twisted and stretched.”
Such consequences could also impact the viability of a retirement plan, as costs would be spent on legal fees rather than on improvements to a plan, the DOL observed. “The outcome will be more money spent on legal fees and less money invested in the voluntary retirement plans employees turn to for financial security. The proper role of the judicial branch is not to make a new hit out of every riff the Plaintiffs’ bar invents. The Ninth Circuit Court of Appeals has an opportunity to act swiftly and close the book on these outrageous actions,” the agency wrote.
Ultimately, the DOL doubles down on its stance that forfeiture practices are common and permissible under ERISA. “The established understanding for several decades has been that defined contribution plans, such as the Plan [as defined below], may allocate forfeited employer contributions to pay benefits for remaining participants rather than using those funds to defray administrative expenses,” the DOL continued. “The Secretary has a substantial interest in fostering established standards of conduct for fiduciaries by clarifying the Secretary’s view that a fiduciary’s use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA.”
More information on the DOL’s brief can be found here.
SEE ALSO:
Forfeiture Litigation Raises New Issues for Plan Fiduciaries
401(k) Forfeiture Lawsuits and SECURE 2.0 Compliance with Richard Clarke
401(k) Forfeiture Lawsuit Wave Still Splashing West Coast
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news. She is originally from Queens, New York, but now resides in Denver, Colorado.
