On July 9th, the Secretary of Labor filed an amicus brief with the Ninth Circuit relating to the appeal of Hutchins v. HP, Inc. In that case, a participant claimed that forfeitures should have been used to offset plan expenses charged to participants rather than offset employer contributions, although the plan document allowed both uses of forfeitures. The Northern District of California dismissed the participant’s claims on two separate occasions, which has led to the appeal.
The amicus brief noted that the practice of the plan was consistent with the established understanding for several decades, and that the DOL had not previously spoken on the issue. The brief stated “… 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.” This is a powerful statement. This statement reinforces what plan sponsors and fiduciaries have understood and is very helpful.
That said, the phrase “without more” is also important because it notes that there may be situations where forfeitures should be used differently than offsetting employer contributions.
Hopefully, the court will strongly consider and follow the amicus brief, and plan sponsors and fiduciaries can take away a couple of points:
- Check your plan documents – Make sure the plan document allows the use of forfeitures as intended (e.g., can be used to offset employer contributions), and that plan administrative expenses can be paid using funds of the plan. Also, although not raised in the brief, it is worth checking your forfeiture administration process to make sure it complies with the plan document (e.g., forfeitures are usually available for other uses only after a participant takes the full balance of their vested account or there has been a five-year break in service).
- Carefully consider plan decisions - While funding is a settlor decision, and plan sponsors are free to establish the level of benefits, implementation of plan terms, like the use of forfeitures, is a fiduciary decision. That implementation decision still requires a plan fiduciary to act with prudence and loyalty. As the amicus brief noted, if the fiduciary chose to use forfeitures to pay plan expenses rather than offset employer contributions, the plan sponsor may not be required to increase its employer contributions, and could decide to reduce participant benefits in the future if it expected forfeitures to not be available to offset future employer contributions. So, the potential for disputes with a sponsor and ultimate impact on participant benefits may support it being prudent and in the participant’s best interest to use forfeitures to offset employer contributions.
Please take a moment to review your plan’s forfeiture practices and procedures. Our Employee Benefits and Executive Compensation attorneys can provide guidance on establishing comprehensive practices and procedures and implementing best practices.
