The Clorox Co. filed a motion to dismiss a proposed class action suit alleging it violated federal benefits law by using 401(k) forfeitures to reduce company contribution costs instead of defraying costs for plan participants.

Participant James McManus filed the complaint against the Clorox Co. and the fiduciaries of the Clorox Co. 401(k) Plan in U.S. District Court for the Northern District of California on October 18. The filing alleges that plan fiduciaries consistently used forfeited funds exclusively for the company’s benefit by reducing company contributions to the plan, instead of by reducing administrative expenses that are passed on to participants.

According to the complaint, from 2017 to 2022, company nonelective contributions to the plan were reduced by a total of $5.7 million as a result of Clorox’s reallocation of forfeited funds. The class action is seeking to recoup any amount the court would find was improperly used, along with litigation fees.

On Wednesday, Clorox filed a motion to dismiss the case on the grounds that the plan committee had laid out the use of forfeitures in the plan documents, as per IRS guidance, and did not violate any fiduciary duties by using the funds as laid out.

“The Complaint should be dismissed because it effectively seeks (i) to bar the long-standing practice, expressly required by a sixty-year-old IRS regulation, of reallocating forfeitures to cover other benefits promised by the Plan and (ii) to require instead that forfeitures be diverted to individual participant accounts to provide additional benefits not promised by the Plan,” the motion states. “The Court should reject Plaintiff’s novel, and strained, construction of ERISA.”

Lawyers for Clorox went on to argue that Congress and the Department of Labor, which has authority over the Employee Retirement Income Security Act, have endorsed this use of forfeitures.

McManus v. Clorox Co. is one of five filed by Pasadena, California-based law firm Hayes Pawlenko LLP this year regarding how plan sponsors managed funds from nonvested portions of terminated participant accounts. In addition to Clorox, those complaints target HP Inc., Intuit Inc., Qualcomm Inc. and Thermo Fisher Scientific Inc.

According to the IRS, participant forfeitures can be used to pay plan expenses, to reduce employer contributions or by allocating them back to plan participants, according to a recent presentation by attorneys from Faegre Drinker Biddle & Reath LLP. How fiduciaries handle forfeitures, however, must be laid out in the plan documents, Faegre Drinker attorneys noted.

In Clorox’s attempt to dismiss the case, its attorneys note the five other complaints being filed in a short period of time, arguing that the law firm is seeking “to undo sixty years of lawful conduct.”

In an additional filing by the Clorox defendants, they requested judicial notice of several plan documents intended to show the fiduciaries followed procedure in documenting how the plan would use participant forfeitures. The documentation included the Clorox Co. 401(k) Plan Amendment and Restatement and summary plan description, both effective January 1, 2017.

“The Court may consider a document that contains the [p]lan’s terms and benefits even though [p]laintiffs do not reference the document in the [complaint],” the court document states.

Clorox has also requested judicial notice of the plan’s Forms 5500 from 2017 to 2023, which were filed with the DOL, as well as excerpts from H.R. No. 99-841, which is a “proper subject of judicial notice because it constitutes excerpts of the legislative history for the Tax Reform Act of 1986.”

Clorox’s 401(k) plan has 6,451 active participants with about $1.87 billion in assets, according to 2022 Form 5500 filings tracked by Brightscope, which, like PLANADVISER, is owned by ISS STOXX.

According to the court documents, eligible Clorox employees begin receiving the plan’s nonelective employer contribution after one year of service. At the end of each calendar year, the company makes a contribution equal to 6% of the participant’s eligible compensation, with vesting of that contribution based on a set schedule according to years of service.

If a participant leaves the plan, any nonvested amount reverts to the plan. The plan document notes that the “[f]orfeited amounts will be used, as determined by the Committee in its sole discretion, to pay Plan expenses, to reduce contributions to the Plan and to restore forfeitures,” according to the court filings.

McManus initially brought six claims of negligence against the plan committee, including breaching fiduciary duties regarding the forfeitures and failing to monitor fiduciary practices. Clorox is seeking dismissal of all six claims. Its request for dismissal was filed ahead of the January 23, 2024 hearing on the case.