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Article | Insider

Recent lawsuits focus on 401(k) plan use of forfeitures

By Stephen Douglas , Rob Haffner and William “Bill” Kalten | November 10, 2023

Four recents lawsuits are challenging the way plan fiduciaries are using forfeited 401(k) money as it relates to ERISA.
Benefits Administration and Outsourcing Solutions|Retirement

In the past several months, a California law firm has filed four separate lawsuits accusing plan fiduciaries of violating ERISA by using plan forfeitures to reduce their future employer contributions rather than to benefit participants.

Under the plan documents, the fiduciaries had discretion to use forfeitures for either purpose; however, the plaintiffs allege that, by opting to use the money to reduce future employer contributions, the plan fiduciaries:

  • Violated ERISA’s fiduciary duties (e.g., failed to act solely in the interest of participants and beneficiaries)
  • Violated ERISA’s anti-inurement provision
  • Engaged in self-dealing and transactions prohibited by ERISA

These claims are surprising given that the use of forfeitures to reduce employer contributions is well established in IRS and Department of Labor guidance.


In recent months, plaintiffs have filed four separate lawsuits — Dimou v. Thermo Fisher Scientific Inc., Rodriguez v. Intuit Inc., Perez-Cruet v. Qualcomm Inc. and McManus v. The Clorox Co. — that challenge how the sponsors of the 401(k) defined contribution plans applied forfeitures. In all four cases, the plans permitted forfeitures to be used to pay for administrative expenses and to reduce future employer contributions, as is permitted under IRS regulations.

New theory of liability alleged in litigation

The plaintiffs alleged that the plan fiduciaries violated their duties under ERISA by deciding to use the forfeitures to offset the employers’ contribution obligations rather than providing benefits that directly benefitted participants (such as by paying expenses that are otherwise charged directly to the participants’ accounts). In addition, the plaintiffs allege that the use of forfeitures to reduce employer contributions resulted in prohibited transactions by effectively transferring property between the plans and the employers.

The plaintiffs are seeking:

  • Restoration to the plan of amounts used to offset employer contributions
  • Disgorgement of the assets and profits made by the plan sponsors’ use of the forfeitures
  • Removal of the plans’ fiduciaries
  • Attorneys’ fees and other equitable relief

Note that using forfeitures to reduce employer contributions is common practice. In fact, the IRS recently proposed regulations regarding the timing for reallocating forfeitures and did not raise any particular concerns about this common practice (assuming it was consistent with the plan’s terms).[1] It is also common for plans to specify that forfeitures may be used for more than one purpose, and the proposed regulations actually encouraged sponsors to do so to avoid the operational qualification failure that would occur if forfeitures are not used by the deadline in the regulation.

Going forward

Given that the litigation is based on ERISA (rather than the Internal Revenue Code), employers may want to be proactive and work with legal counsel to review their plan language and determine whether changes would strengthen their defense in case of any potential future litigation. For instance, employers may want to eliminate any discretionary language regarding the use of forfeitures and instead mandate that forfeitures first be used to reduce employer contributions and then be used to pay administrative expenses (if any forfeitures remain).


  1. For more information on the proposed regulations, see “IRS clarifies timing for reallocating forfeitures,” Insider, April 2023. Return to article

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