Over the past year, at least nine new class actions under the Employee Retirement Income Security Act of 1974 (ERISA) have challenged 401(k) plan sponsors’ use of forfeitures to offset employer matching contributions. The first ruling in this new wave of cases was issued on May 24, 2024, in Perez-Cruet v. Qualcomm Inc.1 The district court denied a motion to dismiss, allowing these novel claims to proceed.
Plaintiff’s claims. The plaintiff in Perez-Cruet is a participant in his former employer’s 401(k) plan. The plan is funded by a combination of participant and employer contributions. Participants are immediately vested in their own contributions but are not fully vested in the company’s matching contributions until two years after their hire date. If employees leave before their two-year work anniversary, they forfeit the company match, and the company, like many employers, allegedly uses those forfeited funds to defray its future contributions to the plan.
Plaintiff sued the company and its benefits plan committee, claiming that the use of forfeitures violates ERISA. Rather than using forfeited funds to defray future contributions, the company allegedly should have used the money to offset the plan’s administrative expenses, which are otherwise charged to participants.
Defendants’ arguments. The defendants moved to dismiss the claims.
First, they argued that using forfeitures to reduce employer contributions is lawful because current Treasury Department regulations explicitly require plans to do so. In particular, 26 C.F.R. § 1.401-7(a) provides that forfeited funds in qualified pension plans “must be used as soon as possible to reduce the employer’s contributions” (emphasis added). “Qualified pension plans” include defined contribution plans, defendants argued, because “defined contribution plans” are a type of “pension plan” as defined under ERISA.2
Second, defendants pointed to a new proposed regulation expressly clarifying that forfeitures may be used to offset employer contributions. The proposed regulation would “clarify that forfeitures arising in any defined contribution plan” may be used to (i) “pay plan administrative expenses,” (ii) “reduce employer contributions under the plan,” or (iii) “increase benefits in other participants’ accounts in accordance with plan terms.”3
The court’s opinion. The district court denied the motion to dismiss. It began by noting that if the defendants had used forfeitures to offset administrative expenses in 2021, then “all Plan participants would have benefited by incurring no administrative expense charge to their accounts” that year. Because the plan sponsor instead used forfeitures to offset its future contributions, plaintiff had plausibly alleged that defendants “dealt with assets of the Plan for [their] own account” in breach of ERISA’s duty of loyalty. It also held that the plaintiff stated a claim for breach of ERISA’s duty of prudence because defendants allegedly “harmed the participants” by “letting the administrative expense charge fall on the participants rather than the employer” — even though the plan documents expressly allowed the challenged use of forfeitures. Applying similar reasoning, the court concluded that the plaintiff also adequately pleaded violations of ERISA’s anti-inurement and prohibited transaction provisions.
The opinion did not address the current Treasury Department regulation requiring forfeitures to be “used ... to reduce the employer’s contributions.” And although the opinion did discuss the proposed Treasury Department regulation, it concluded that the proposed regulation was “not sufficient to persuade this Court” because “[t]he proposed regulation has not yet been adopted,” and “the regulation is proposed by the Secretary of the Treasury rather than the Secretary of the Department of Labor.” The court reasoned that “ERISA specifies that it is the Secretary of Labor who has authority to define what are assets of a pension plan” and that the Treasury Department’s proposed regulation thus did not have enough “persuasive value,” even though both the Secretary of Labor and the Secretary of the Treasury have rulemaking authority under ERISA.4
Takeaways. This is the first opinion in this wave of cases, and it is not clear whether other courts will follow its lead, especially as it did not address the current Treasury regulation. Courts that address that regulation in pending or future cases may conclude that it requires dismissal. Further actions by the Treasury Department to finalize or modify its proposed new rule on this topic may also affect these cases.
1 No. 23-cv-1890 (S.D. Cal.).
2 See 29 U.S.C. § 1002(34).
3 88 Fed. Reg. 12282, 12283, 12285 (Feb. 27, 2023) (emphasis added).
4 See, e.g., 29 U.S.C. § 1204.
