Conflicting orders on motions to dismiss from two California courts foreshadow issues for a new theory of ERISA liability. Employers have faced a recent wave of novel ERISA class actions that challenge the reallocation of defined contribution plan forfeitures.  Such plans often include provisions requiring participants to work for the employer for a defined period before their right to any employer contributions in their account vests. When a participant terminates employment before vesting, their unvested, forfeited employer contributions are swept into the plan’s forfeiture account. The recent lawsuits challenge an employer’s decision to use this account to make later employer contributions rather than defray administrative fees otherwise payable by the participants. Plaintiffs allege that this decision violates ERISA’s fiduciary duties as well as anti-inurement and prohibited transaction rules.

In Perez-Cruet v. Qualcomm Inc., a district court in the Southern District of California recently denied Qualcomm’s motion to dismiss:

• Plaintiffs’ imprudence claim survived because ERISA’s duty of prudence supersedes plan document instructions. The fact that the plan document granted Qualcomm discretion to use forfeited money to reduce employer contributions or pay administrative expenses was not grounds to dismiss.
• Plaintiffs’ breach of fiduciary duty claim survived because using forfeitures to make employer contributions benefited Qualcomm, and not plan participants.
• Plaintiffs’ anti-inurement claim survived dismissal, rejecting defendants’ argument that unvested employer contributions should be treated as mistaken contributions (a statutory exception to the anti-inurement rule).
• The court sustained plaintiffs’ prohibited transaction claim, finding that unvested employer contributions qualified as plan assets, and thus the employer’s reallocation of those funds for their own benefit was sufficient to state a prohibited transaction claim.

Conversely, in Hutchins v. HP Inc., a district court in the Northern District of California granted defendants’ motion to dismiss without prejudice:

• This court held that plaintiffs’ theory, that an employer violates ERISA any time it uses forfeited money to make employer contributions rather than defray administrative fees, is both too broad and implausible to state a claim.
• The court distinguished Perez-Cruet in finding that the forfeited money did not violate ERISA’s anti-inurement rule because the money never left the plan’s trust account and was used to pay benefits to plan participants.
• And because the forfeited money never left the trust account, defendants’ decision to reallocate it was not a transaction, and plaintiffs’ prohibited transaction claim failed as well.

In both decisions the courts recognized that plaintiffs’ allegations and their decisions were treading into uncharted waters. Given the novelty of these claims, and the specific details of each plan’s operations and terms, different courts are likely to reach disparate outcomes as litigants navigate the first wave of “forfeiture” cases.

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.