Important Update: DOL Weighs in on Forfeiture Lawsuits
After recent legal challenges around how 401(k) plan forfeitures are used, the Department of Labor (DOL) has offered its opinion, and it’s a positive sign for plan sponsors.
In a well-known case involving HP Inc., the plaintiffs argued that HP misused forfeitures by applying them to reduce employer contributions, instead of reallocating them to participants or covering plan expenses.
Although the court dismissed the case, it acknowledged that the legal theory was new and allowed the plaintiffs a chance to revise and refile their argument. Still, the judge initially found their claims too broad and lacking support from existing law.
What stood out was the DOL’s input in an amicus brief during the appeal:
– The DOL pointed to the IRS’s long-standing approval of using forfeitures to reduce employer contributions.
– It also stated that while deciding how to use forfeitures is a fiduciary responsibility, using them to offset employer contributions does not automatically violate fiduciary duties like loyalty or prudence.
What This Means for Plan Sponsors
– The IRS currently allows forfeitures to be used in several ways: reducing employer contributions, covering plan expenses, or reallocating to participants.
– The DOL’s comments support the legality of using forfeitures to reduce employer contributions, as long as it aligns with the plan document and is appropriately handled.
– Even so, plan sponsors should regularly review their plan documents and carefully document any fiduciary decisions related to forfeiture use.
As legal interpretations continue to evolve, this guidance from the DOL provides valuable clarity and reassurance for plan sponsors. By ensuring forfeiture practices are consistent with plan documents and fiduciary duties are well-documented, sponsors can move forward with greater confidence and compliance.