The Wagner Law Group continues to monitor the ongoing flood of “forfeiture” litigation. This alert is our seventh reporting on and analyzing the nature of the claims raised by plaintiffs, the defenses asserted against them, and the court opinions deciding the issues raised in these cases. To date, we count 20 forfeiture lawsuits filed in a variety of jurisdictions (half in federal courts in California). Five decisions on motions to dismiss have been issued so far – two favoring plaintiffs and three favoring defendants.
In this article, we question a critical assumption underlying all of the forfeiture complaints and all of the court decisions we have observed to date: the assumption that forfeiture accounts hold only nonvested employer contributions and, therefore, the only issue that needs to be considered is whether nonvested employer contributions may be used to fund employer contributions. As evidenced by a perusal of Forms 5500 readily available on the Department of Labor’s eFast system (Form 5500 filings are available to the public) and other publicly available information, it appears that this assumption is likely incorrect. Instead, the available Form 5500 information demonstrates that many forfeiture accounts contain not only nonvested employer contributions, but also other vested and distributed amounts, such as vested plan assets transferred conditionally from the accounts of missing or nonresponsive participants and uncashed checks.
Cases Assume That Forfeitures Consist Solely of Non-Vested Employer Contributions:
As noted above, 20 forfeiture lawsuits have been filed within the past year claiming misconduct relating to the use of assets held in plan forfeiture accounts to fund employer contributions. The complaints filed in each of the recent actions describe forfeiture accounts as holding nonvested employer contributions and nothing else. The allegations in the Knight-Swift complaint (the most recent forfeiture complaint) are typical of such allegations:
- Plan participants typically make pre-tax contributions each pay period to their individual Plan accounts. They are immediately vested in their own contributions to their individual Plan accounts, plus actual earnings thereon. Defendant also matches, to a certain amount, contributions that Plan participants make to their individual Plan accounts. Vesting in the matching portion of participant accounts, plus actual earnings thereon, is based on years of credited service. A participant is 100% vested after five years of credited service. Notwithstanding the above, a participant is fully vested upon reaching normal retirement age, death, or permanent disability.
- When a Plan participant has a break in service prior to full vesting, the participant forfeits the balance of any unvested contributions in his or her individual account.
Sievert v. Knight-Swift Transportation Holdings, Inc., Case No. 24-cv-2443 (D. Ariz. 9/16/2024); Complaint ¶¶ 8-9. The Knight-Swift complaint, like all the other forfeiture action complaints filed to date, identifies no other assets held in a forfeiture account.
Following the lead of the complaints before them, the five district court decisions issued to date have also focused solely on one possible source (albeit the primary source) of forfeiture assets – nonvested employer contributions forfeited from the accounts of ex-employees. See e.g., Qualcomm, 23-cv-1890 (S.D. Cal. 5/24/24) p. 13 (“Nonvested contributions fall within the functional definition of assets of the pension plan”); HP Inc., 23-cv-5875 (N.D. Cal. 6/17/24)), p. 2 (“Defendants have discretionary authority and control over how forfeited matching contributions are used…”); Intuit, 23-cv-5053 (N.D. Cal. 8/12/24), p. 3 (“If a participant has a break in service prior to full vesting of the Company’s matching contributions, the participant forfeits the balance of unvested Company matching contributions in his or her individual account. [Compl.] ¶ 19”); BAE Systems, 24-cv-00536 (E.D.Va. 9/5/24), p. 2 (“If a Plan participant has a break in service before Defendant’s contributions become fully vested, the balance of the unvested contributions is forfeited.” [Compl.] ¶ 9); Thermo Fisher, 23-cv-1743 (S.D. Cal. 9/19/24), p. 2 (“When a participant has a break in benefit service before the full vesting of the Company’s matching contributions, the Plan participant forfeits the balance of unvested Company contributions in his/her account”).
Despite this uniformity in the complaints, there was information before at least one court that forfeiture accounts may hold more than nonvested employer contributions. See Intuit, pp. 3-4:
Any amounts forfeited pursuant to this Section [regarding nonvested employer contributions], any amounts attributable to forfeitures transferred pursuant to the merger of another tax qualified plan with this Plan, and any other amounts to be treated as forfeitures under the Plan, shall be applied, at the Company’s election, to: (i) pay expenses of administering the Plan; (ii) with respect to forfeitures of Matching Contributions or Safe Harbor Matching Contributions, reduce the Participating Employers’ obligation to make Safe Harbor Matching Contributions; and (iii) with respect to forfeitures of Profit Sharing Contributions, allocated as Profit Sharing Contributions pursuant to Section 4.7. (Emphasis added)
While the Intuit decision does not address whether “other amounts to be treated as forfeitures under the Plan” are to be treated or analyzed differently from nonvested employer contribution amounts, it is conceivable that future actions and future decisions will. Consequently, more attention should be paid to the “other” sources of assets held in forfeiture accounts.
Sources of Forfeiture Assets Other Than Nonvested Employer Contributions:
Of the other possible sources of forfeiture assets, two appear to be the most common: conditionally forfeited account balances and uncashed checks. “Conditional forfeitures” occur when the account balance of a missing participant is forfeited under a plan provision incorporating 26 C.F.R. § 1.411(a)-4(b)(6). The Department of Labor has indicated that conditional forfeitures may occur in the context of individual account plans. See Field Assistance Bulletin No. 2021-01, n. 3: [T]his temporary enforcement policy will not apply to a terminating individual account plan containing a Treasury Regulation 26 CFR 1.411(a)-4(b)(6) conditional forfeiture provision, unless the conditionally forfeited accounts of all missing participants and beneficiaries are fully restored and transferred to the PBGC”. https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-01.[1]
Uncashed checks are the other most common possible source of forfeited funds. As the ERISA Advisory Council noted in 2019:
The testimony suggested that, in the year 2017, roughly 4.5% of all checks go uncashed. Roughly 5 million checks were issued from defined contribution plans, which would suggest that 225,000 checks may have gone uncashed in defined contribution plans alone. Based on the experience of Council members, and testimony and conversations with recordkeepers, the value of uncashed retirement plan checks likely exceeds $100 million per year but could be considerably larger. This suggests that the total value of uncashed retirement plan checks could easily exceed $500 million cumulatively.
2019 Advisory Council on Employee Welfare and Pension Benefit Plans Permissive Transfers of Uncashed Checks from ERISA Plans to State Unclaimed Property Funds, p. 12. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/employee-advisory-council-voluntary-transfers-uncashed-checks.pdf. The Council further noted that while many plans leave uncashed amounts in the plan’s disbursement account and some plans transfer the amount to an IRA or other account, other plans “forfeit the uncashed check amount to the plan with a right of restoration pursuant to Treasury regulations (‘forfeiture and reinstatement’).” Id., p. 14. The Council concluded:
Many plans provide that if a participant or beneficiary cannot be located, the amount of the benefit is forfeited, subject to restoration if the participant or beneficiary later returns to make a claim for benefits. The amounts that are forfeited are used for the benefit of the plan, typically to pay reasonable plan expenses but also to reduce employer contributions . . . The Council heard testimony from the American Benefits Council that, in a brief survey they conducted of their members, nearly half (49%) used the forfeiture-and-reinstatement method.
Id., pp. 16-17.
Thoughts:
Because none of the recent forfeiture complaints or court decisions to date has focused on the use of forfeiture amounts arising from sources other than nonvested employer contributions, there is as of yet no allegation or court decision considering how these additional facts may impact the legal analysis of their use to fund employer contributions. At The Wagner Law Group, we are already considering these matters and the unique issues likely to arise in future litigation. Will new facts relating to the source of forfeiture assets impact a future court’s view about fiduciary breach of claims duties, prohibited transactions or improper inurement of assets held in forfeiture accounts? While we have our own thoughts about where the cases will go with these issues, we will watch closely as future litigants and/or courts address these matters to see how these issues actually unfold. Regardless of the outcome, we predict that the uncertainties presented by the ongoing forfeiture litigation will continue to present a variety of vexing issues for fiduciaries, plan sponsors, litigants and the courts.
As the forfeiture cases unfold, plan sponsors should certainly review the forfeiture provisions of their own defined contribution plans to determine what, if any, actions might be advisable to reduce the risk of litigation. In the meantime, plan sponsors and fiduciaries should consider whether fiduciary decisions relating to forfeitures could be seen as relieving them of obligations to the plan and imposing additional costs on participants, and whether action should be taken now that might mitigate litigation risk going forward.
If you have concerns about the language in your tax-qualified defined contribution plan(s) and the fiduciary duties raised in the forfeiture cases, we would be happy to discuss the ways in which existing plan language could be modified to protect the plan’s fiduciaries and sponsor. Contact us online or call 617-357-5200.
[1] In a publication entitled “Missing Participants – Best Practices for Pension Plans” issued on the same day as FAB 2021-01, at note 1, the Department also observed:
ERISA’s fiduciary obligations apply equally to defined benefit plans and defined contribution plans, and these best practice tips apply equally to both types of plans. The Department also stresses that ERISA’s fiduciary obligations fully apply to missing participants whose accounts the plan purports to treat as “conditionally forfeited” under Treasury Regulation 1.411(a)-4(b)(6). Under Title I of ERISA, plan fiduciaries retain full responsibility for adhering to Title I’s provisions with respect to such participants and their beneficiaries; these participants and beneficiaries remain fully entitled to all their promised benefits; and the fiduciaries have an obligation to keep accurate records and take appropriate steps to ensure that the participants and beneficiaries are paid their full benefits when due.
