Recent Developments in ERISA Forfeiture Litigation

In Hutchins v. HP Inc., No. 5:23-cv-05875-BLF (N.D. Cal. Feb. 5, 2025), a federal court in California granted a motion to dismiss a lawsuit that plan fiduciaries violated their ERISA duties by using forfeited plan assets (e.g., the non-vested employer contributions in a terminated, former employee’s account) to reduce employer contributions, rather than pay administrative costs the plan charges to plan participants.

This case is part of a broader trend of class action ERISA lawsuits challenging the use of forfeitures. In general, plaintiffs in these cases allege that employer plan fiduciaries breach their fiduciary duties and engage in self-dealing in violation of ERISA when it is decided to use forfeitures to reduce employer contributions rather than increase participant benefits by paying administrative costs otherwise charged to plan participants.

Central to the premise of these lawsuits is that, generally, fiduciary obligations arise because an employer plan fiduciary has discretion to choose between using forfeited funds to reduce employer contributions or pay administrative costs. Faced with that choice, a fiduciary would always be required choose to pay administrative costs, since doing so would be to the financial benefit of plan participants – an outcome that the court in HP viewed as overbroad and contrary to longstanding regulatory practice.

As noted above, the nominee to head EBSA has indicated that DOL may prioritize issuing guidance on use of forfeitures that could reduce uncertainty arising from this litigation trend. In the meantime, this decision speaks more broadly to the importance of reviewing, and possibly updating, plan terms concerning forfeitures. As the forfeiture lawsuits illustrate, whether a plan document permits or mandates use of forfeitures can have implications in the event of potential litigation.