A wave of ERISA lawsuits is challenging the common practice of using forfeited 401(k) assets—typically from unvested employer contributions—to offset employer matching contributions rather than directly benefiting participants. The latest case, filed by Schlichter Bogard against Charter Communications, has intensified scrutiny on this issue, with potential far-reaching consequences for defined contribution (DC) plans. Legal experts argue that if forfeiture assets are deemed plan assets, they must be used solely for participants, rather than reducing employer costs.
While some cases, such as the Honeywell lawsuit, have been dismissed, legal experts caution that these claims are gaining momentum, posing significant risks for plan sponsors that continue the practice without proper documentation. Although the IRS permits the use of forfeitures to offset matches, plaintiffs argue that ERISA supersedes IRS rules, making legal exposure a major concern. If courts side with participants, plan sponsors may need to amend their plan documents to remain compliant. As the legal battle unfolds—potentially reaching the Supreme Court—advisors are urged to educate clients on the risks. The fallout could even lead to some employers reducing matching contributions to mitigate uncertainty.
Fred Barstein explores these pressing legal challenges in his latest article, “Forfeiture Lawsuits Set to Upend 401(k) Plans.” [Read more here.]
