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The ERISA Edit: Complaints Alleging Mishandling of Forfeitures on the Rise

Employee Benefits Alert

Wave of 401(k)-Forfeiture Lawsuits Grows

One law firm has filed at least five putative class actions in California's federal district courts, alleging that certain companies mishandled unvested 401(k) contributions that employees might forfeit when leaving those companies. The employers — Qualcomm Inc., Intuit Inc., Clorox Co., Thermo Fisher Scientific Inc. (Thermo Fisher), and Honeywell International Inc. (Honeywell) — are alleged to be plan sponsors, plan fiduciaries, and plan administrators, and the language of the plans in question allegedly required the companies to use any unvested contributions to cover the plans' expenses. The named plaintiffs allege, however, that the companies instead used the funds to reduce the companies' own contributions to the plans. 

The most recent complaint, filed against Honeywell on February 13, 2024, asserts that, unlike employee contributions, which immediately fully vest, employer contributions remain unvested for a period of three years and can be forfeited in whole or in part if a worker leaves the company before the vesting period ends. The named plaintiff claims: 

  • First, although the defendants (i.e., Honeywell and 10 unnamed "Doe" plan fiduciaries) were required under ERISA § 404(a)(1)(A) to discharge their duties to the Honeywell Plan "solely in the interests of the participants and beneficiaries" and "for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan," they "utiliz[ed] forfeited funds in the Plan for the benefit of the Company" by reducing the company's own contributions to the Plan and "thereby saving the Company millions of dollars each year at the expense of the Plan which received decreased Company contributions."  
  • Second, although the defendants were required under ERISA § 404(a)(1)(B) to discharge their duties "with the care, skill, prudence, and diligence," they failed to "engage in a reasoned and impartial decision-making process" and "failed to consider whether participants would be better served" by using the forfeited funds to for something other than reducing the company's contributions.
  • Third, although ERISA § 403(c)(1) requires that the assets of a plan "shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan," and although unvested, forfeited contributions become plan assets under the terms of the plan, the defendants used those funds to benefit Honeywell by using them "as a substitute for the Company's own contributions to the Plan." 
  • Fourth, although ERISA § 406(a)(1) prohibits certain transactions between a plan and a party in interest, the defendants caused the Honeywell Plan to engage in the "direct or indirect exchange of existing Plan assets for future employer contributions."
  • Fifth, although ERISA § 406(b) prohibits a fiduciary from dealing with the assets of the plan "in his own interest or for his own account," the defendants used plan assets "as a substitute for employer contributions to the Plan . . . [and thereby] dealt with the assets of the Plan in their own interest and for their own account."  

The other four complaints filed by the law firm assert a sixth claim, that the employers failed to monitor the plans' fiduciaries. For example, the complaint against Thermo Fisher states that "[t]o the extent any of the fiduciary responsibilities of Thermo Fisher were delegated to another fiduciary, the Company's monitoring duties included an obligation to ensure that any delegated tasks or responsibilities were being performed in accordance with ERISA's fiduciary standards." The company allegedly breached that duty by "failing to monitor the Committee's management and use of forfeited funds in the Plan and by failing to take steps to ensure that the Committee was discharging its duties with respect to Plan assets for the sole benefit of Plan participants and beneficiaries."  

The potential merit of these cases remains to be seen. The parties in the Thermo Fisher case, the first of the six to be filed, just wrapped up briefing on the defendants' motion to dismiss, in which the defendants argue that the named plaintiff has failed to allege a breach of fiduciary duty, because funding a plan is a settlor function, not a fiduciary function, and because the complaint does not allege an injury to the plan. In their motion, the defendants also argue that the complaint fails to state claims that they violated ERISA's anti-inurement provision or its prohibited-transaction provisions and it fails to state a claim for failure to monitor plan fiduciaries. 

Supreme Court Declines Review of ERISA Claims Regulation Full and Fair Review Standard

On February 20, 2024, the U.S. Supreme Court denied United Behavioral Health's (United) request for review of the Tenth Circuit's May 2023 decision in D.K. v. United Behavioral Health, 67 F.4th 1224 (10th Cir. 2023). As we previously reported, in D.K., the Tenth Circuit held that pursuant to the "full and fair review" requirement of ERISA § 503 and its implementing health claims regulations, administrators must "engage" in a "meaningful dialogue" with participants and respond to the opinions of treating healthcare providers in their denial letters. Affirming summary judgment in favor of a participant who sought coverage of long-term mental health residential care, the Tenth Circuit found that United arbitrarily and capriciously denied the participant's claims with "conclusory responses" and without proper consideration of the medical record and opinions of the participant's treating providers. At issue was whether a 2016 update to the U.S. Department of Labor's (DOL's) claims regulations, which expressly required disability claim administrators to explain any disagreement with the views presented by treating healthcare providers when making benefit determinations, applies to medical claim determinations. United argued that the new regulations established a stricter standard for disability claims that did not apply to medical claims. The plaintiffs and DOL as amicus curiae disagreed, arguing that "any variation in the wording of the regulations with respect to disability and health plans does not change the materially similar full and fair review standards required by the regulations." 

The Supreme Court's decision to deny certiorari was not surprising given the absence of a split among the federal circuit courts. Thus, for now, D.K. applies only to claims reviews within the Tenth Circuit's geographical jurisdiction (Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming). Leaving D.K. in place creates some uncertainty as to the standards that should be adopted by claims reviewers outside the Tenth Circuit, but it also creates an opportunity for other courts to weigh in on this issue. 

Upcoming Speaking Engagements and Events

On March 7, Joanne Roskey will present the webinar "Are You Ready For It? Health Plan Fee Litigation (ERIC's Version)" in partnership with The ERISA Industry Committee (ERIC). 

In the News

Joanne Roskey comments on the significance of a new employee-led lawsuit against Johnson & Johnson that claims the company violated federal benefits law by letting pharmacy benefit manager (PBM) Express Scripts overcharge its health plan and plan participants for drugs in recent articles by Law360 and Bloomberg Law.

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