District Court Grants Motion to Dismiss Forfeiture Complaint

Then, last month, we wrote about the first ruling on a motion to dismiss one of these cases: https://www.wagnerlawgroup.com/blog/2024/06/district-court-denies-motion-to-dismiss-forfeiture-complaint/. That article discusses the May 24, 2024, decision by the United States District Court for the Southern District of California (Judge Benitez) denying Qualcomm’s motion to dismiss. It outlines how the district court in Qualcomm addressed and overruled arguments seeking to dismiss six substantive causes of action based on allegations asserting the misuse of plan forfeitures and the court’s conclusion that the plaintiff in that case had plausibly alleged violations of ERISA §§ 404(a)(1)(A) and (B), 403(c)(1) and 406(a)(1)(A) and (D), as well as 406(b). It is no surprise, however, that the Qualcomm decision was not the last word on the forfeiture cases.

Less than one month after the Qualcomm decision was issued, on June 17, 2024, the United States District Court for the Northern District of California (Judge Freeman) issued the second substantive ruling in a forfeiture complaint, granting HP Inc.’s motion to dismiss. Hutchins v. HP Inc., et al., 23-cv-5875 (N.D. Cal. 6/17/2024). In a well-reasoned discussion, over 20 pages, the district court in HP Inc. addressed both defendants’ and plaintiff’s arguments and, ultimately, ruled in favor of the defendants.

The HP Inc. court, like the Qualcomm court, agreed that Treasury regulations did not foreclose the plaintiff’s claims. In particular, the HP Inc. court concluded that the plan at issue was not the type of plan to which 26 C.F.R. § 1.401-7(a) applied. In addition, the court concluded that Treasury’s proposed language (88 FR 12282-01, Feb. 27, 2023) also did not apply to HP Inc.’s particular plan. Even so, the court concluded: “Although neither authority forecloses Plaintiff’s theory as a matter of law, the Court agrees with Defendants that these authorities may be considered as persuasive authority in evaluating the plausibility of Plaintiff’s claims.”

The HP Inc. court then found that the defendants were acting as fiduciaries when they decided to allocate forfeited amounts to reduce employer contributions rather than to pay plan expenses. In particular, the court held that, while the decision to include three options for the use of forfeited amounts in the plan was a settlor function not subject to ERISA’s fiduciary rules, that was not the end of the analysis: “Plaintiff’s challenge is not to § 11(h) of the Plan [providing the three options], but to Defendants’ selection of one of the options under § 11(h)” and, therefore, the court concluded, “Defendants acted as fiduciaries when they determined how to allocate forfeited amounts.”

Unfortunately for the plaintiff however, the court’s remaining rulings were not as favorable. The HP Inc. court concluded that the plaintiff’s allegations were fatally flawed because they completely foreclosed the plan’s fiduciaries from ever exercising any option other than using forfeited funds to pay plan expenses:

The Court finds that Plaintiff’s theory of liability has broad reach, and it is the theory’s breadth that makes it implausible. Plaintiff alleges that Defendants breached their fiduciary duties of loyalty and prudence when they chose to allocate forfeited amounts to reduce employer contributions rather than to pay administrative expenses. See Compl. ¶¶ 38–39, 44–46. The import of these allegations is that, if given the option between using forfeited funds to pay administrative costs or to reduce employer contributions, a fiduciary is always required to choose to pay administrative costs. But the flaw in such a theory is that it is not limited to any particular circumstances that may be present in this case.

. . .

This broad allegation is implausible because it would improperly extend ERISA beyond its bounds and would be contrary [to] the settled understanding of Congress and the Treasury Department regarding defined contribution plans like the one at issue in this case.

The Court recognized that participants would always be better off if forfeited amounts were used to pay plan expenses rather than to reduce employer contributions. Even so, the Court reasoned:

ERISA does not mandate what benefits an employer must provide under a plan and does no more than protect the benefits which are due to an employee under a plan. See Spink, 517 U.S. at 887; Wright, 360 F.3d at 1100. Because Plaintiff’s claims are so broad, he is effectively arguing that the fiduciary duties of loyalty and prudence create a benefit: the payment of his administrative costs. However, the Plan does not provide any such benefit, and Plaintiff does not allege any facts showing that he is entitled to such a benefit. Cf. Plan § 17(b). To the extent he relies on the fiduciary duty provisions of ERISA to create an entitlement to administrative costs, consistent with the statutory framework, those provisions “create[] no exclusive duty of maximizing pecuniary benefits. Under ERISA the fiduciaries’ duties are found largely in the terms of the plan itself.” Foltz v. U.S. News & World Rep., Inc., 865 F.2d 364, 373 (D.C. Cir. 1989).

[Citations omitted].

Finally, the court ruled that, even though the particular Treasury regulations cited by defendants were not applicable to the Plan, those same regulations and other sources demonstrated a “settled understanding of Congress and the Treasury Department” that forfeited amounts could be used to reduce employer contributions: “The Court does not understand the general provisions of the fiduciary duty provision of ERISA to not only create a benefit to which Plaintiff is not entitled but also to abrogate Treasury regulations and settled rules regarding the use of forfeitures in defined contribution plans.”

The HP Inc. court also rejected claims that defendants’ decision to use forfeited amounts to fund employer contributions violated ERISA’s anti-inurement provision. It noted that no plan assets are alleged to have been removed from the Plan and focused on the fact that the forfeited amounts always remained in the Plan. In addition, the court rejected arguments that defendants’ actions violated ERISA’s prohibited transaction provisions:

Plaintiff’s allegations show that forfeited amounts remain Plan assets and are merely reallocated to provide pension benefits to other employees through use as matching contributions. But this is not a prohibited transaction. See Hagemeyer, 2006 WL 8443663, at *6. In addition, the fact that reallocation of the forfeited amounts will reduce the amount that HP contributes as matching contributions in the future does not make this a transaction for purposes of § 1106. See Black, 2017 WL 8948732, at *8–9

Finally, the HP Inc. court rejected claims relating to alleged failures to monitor as derivative of the plaintiff’s other failed claims.

It is notable that the HP Inc. court’s dismissal of the plaintiff’s claims was made without prejudice to the plaintiff’s filing an amended complaint addressing the matters raised in the Court’s decision. Consequently, just as the Qualcomm Court’s decision does not end that case, the HP Inc. decision also does not conclude that case.

Thoughts:

The HP Inc. decision is certainly welcome news for the many defendants who are currently facing complaints alleging misuse of forfeited amounts. It addresses head-on the essence of the plaintiff’s case and provides a series of rulings that will almost certainly be considered by future courts faced with the same issues.

In December, the Wagner Law Group noted that we did not share the general sentiment that the recent spate of forfeiture cases was unlikely to succeed. Our skepticism about the ease with which these forfeiture cases might be dismissed was borne out by the Qualcomm ruling and its point-by-point resolution of the issues in favor of the plaintiff. The HP Inc. case, with its full consideration of the many issues raised in these cases and its robust ruling in favor of defendants, demonstrates that plaintiffs also have a long way to go to success in these cases.

Both rulings should serve as a signal for plan sponsors to review the forfeiture provisions of their defined contribution plans to determine what, if any, actions might be advisable to reduce the risk of litigation. For example, consideration should be given to whether fiduciary decisions relating to forfeitures could be seen as relieving the employer of an obligation to the plan and imposing additional costs on participants and whether action should be taken now that might mitigate any litigation risk going forward. Plan sponsors and relevant fiduciaries could also defer decisions on the allocation of forfeitures to see if decisions on the motions to dismiss in the other cases challenging the allocation of forfeitures provide additional guidance on this issue. Note, however, that decisions in these cases challenging the allocation of forfeitures will have no effect on the tax-qualified status of the plan.