erisa benefits hinge on plan terms

New Wave of 401 (k) Forfeiture Lawsuits May Hinge on Plan Terms

Recently, leading tech giants like Qualcomm Inc., Intuit Inc., and Clorox Co. are facing serious lawsuits concerning the forfeiture of 401 (k) money. The discussion is centered around the fact that a common way of handling the amount could result in a violation of federal law. This legal theory could make cases turn on the plan documents, as suspected by experts.

In addition to the above-mentioned companies, the lawsuits also target Thermo Fsicher Inc. center with regard to the portion of the employee’s 401(k) account contributed by the employer. The concern is while the employee’s contributions are fully vested, those from the employer can remain unverified for a period of time and could later be partly or fully forfeited when the employee leaves the company, maybe in a few months or some years.

According to these lawsuits, companies were using the forfeited amounts to cut down the money that they would otherwise be forced to contribute to their plans rather than incurring it on the administrative expenses borne by employees.

That said, lawyers interviewed by Bloomberg Law state that the practice of using 401(k) forfeitures to bring down employer contributions has been a practice in place for a long. A couple of cases indicating doubts about the practice have been filed by Hayes Pawlenko LLP, a small law firm in California that didn’t respond to any inquiries pertaining to the case.

Plan Terms
Similar to many other ERISA disputes, this legal theory could turn the focus on the language or writings on the plan document.

Brock J. Specht, a partner with Nichols Kaster PLLP in Minneapolis, says that it’s quite common for 401(k) plans to mention that the forfeited amounts must be used toward administrative expenses or employer contributions. He says that while some documents clearly state what should be done, others are somewhat vague.

In this regard, the complaints against Qualcomm, Intuit, Thermo Fischer, and Clorox – all grant their respective employers the discretion on whether to put forfeitures towards expenses or contributions. Several lawyers from different law firms have provided their opinions on this. If you wish to delve deeper into the legal side of it, you may reach out to an ERISA benefits lawyer.

For example, Andrew L.Oringer, a partner in the Wagner Law Group in New York, says that a case where the forfeitures are used in a way that’s not in accordance with the plan documents could be more challenging for the employers to defend themselves. He added that employers must confirm that whatever they are doing with the forfeitures is at the least as per the plan documents, not prohibited.

Fiduciary Obligations
As per ERISA, fiduciaries of the plan act in the best interests of the participants involved.

“If the level of benefits is itself a fiduciary question, then every plan has to provide the maximum benefit permitted by law, all the way up to the highest limitation,” Oringer said. “That obviously is not the way the rules work.”

In this regard, Rene E. Thorne, a principal with Jackson Lewis PC in New Orleans, said that just because an employer can choose how to use plan forfeitures does not mean they are acting in a fiduciary capacity under ERISA. She said that seeking guidance from the Internal Revenue Service confirms the fact that employers have a choice with respect to using the forfeitures.

Specht emphasized the fact that the legal theory could be expanded by the cases depending on the correctness of the facts.

“If there’s a fiduciary obligation imposed, it’s an obligation to use the money in the interest of the participants, and not for the interests of the employer,” Specht said. “That’s the fundamental duty of loyalty, and to the extent they’re not doing that, it’s a serious problem.”

Next Big Thing?
ERISA cases have been many, often in series of waves. These include cases relating to retirement plans from large universities, pension plans that calculate benefits based on historical data on life expectancy, and more.

In this regard, Lakatos said that as more cases get filed under a statute, smaller firms would start filing smaller cases. Thorne added that this would encourage non-ERISA plaintiffs to dig ERISA for new causes of action, resulting in more legal theories.

Oringer said that those on the plaintiff’s side would find new reasons to benefit from identifying common practices not performed correctly, and this could lead to a new wave of litigation.

He added that if they could find a highly rampant practice and convince the court that it is not done in the proper way, they hold the key to the “next era” of litigation.


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