Compliance October 11, 2023

Two Plan Sponsors Accused of Improper Use of 401(k) Forfeitures

ERISA experts point to longstanding and widespread practice of using forfeitures to reduce future employer contributions or pay reasonable expenses.

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In two recent lawsuits, plan fiduciaries have been accused of violating ERISA by using plan forfeitures to offset future employer contributions, as well as to pay administrative expenses.

The use of forfeitures, or the non-vested portion of a former employee’s account balance in a retirement plan, to offset employer contributions is a longstanding practice explicitly permitted under Treasury regulations and consistent with guidance from the Department of Labor, according to Groom Law Group.

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Representatives from the law firm, which is not involved with either case, stated that the claims are surprising, given that this use of forfeitures is well established and widespread.

Separate Complaints Filed by Same Law Firm

In Dimou v. Thermo Fisher Scientific Inc.—filed on September 19 in U.S. District Court for the Southern District of California—Konstantina Dimou, a participant in Thermo Fisher’s 401(k) plan and represented by law firm Hayes Pawlenko LLP, alleges that the employer breached its fiduciary duties under the Employee Retirement Income Security Act and “consistently chose to utilize the forfeited funds in the plan exclusively for the company’s own benefit, to the detriment of plan and its participants, by using these plan assets solely to reduce future company contributions to the plan.”

The biotechnology company, which has more than $6 billion in plan assets, maintains offices in South San Francisco and Carlsbad, California, among other national and international locations, and employs more than 300,000 people.

According to the complaint, the governing plan documents state that the company will allocate and use all or a portion of a participant’s benefit forfeited under the plan to either pay for “reasonable expenses of the plan” or reduce its discretionary contributions, special contributions, matching contributions and other contributions payable under the plan.

The complaint alleges that Thermo Fisher consistently declined to use any of these plan assets to cover plan expenses over at least the past six years. Further, the lawsuit states that all participant accounts have been charged with administrative expenses, on at least a quarterly basis, over that period.

“The deduction of administrative expenses from participant accounts reduces the funds available to participants for distributing and/or investing,” the complaint states.

Thermo Fisher did not immediately respond to a request for comment.

In another complaint, Rodriguez v. Intuit Inc., filed on October 2 in the U.S. District Court for the Northern District of California, plan participant Deborah Rodriguez, also represented by Hayes Pawlenko LLP, similarly alleges that Intuit Inc. reallocated forfeited funds for its own benefit, to the detriment of the plan and its participants.

The financial software company is accused of reallocating nearly all forfeited plan assets to reduce future company matching contributions to the plan, according to the complaint. As of 2021, the plan had more than $2 billion in assets, according to Form 5500 filings.

The complaint states that in 2021, company matching contributions to the plan were reduced by $2.273 million as a result of Intuit’s reallocation of forfeited nonvested funds for “the company’s own benefit.” Only $74,000 of nonvested funds were used to pay plan expenses totaling $975,040, leaving a balance of approximately $140,000 in the forfeiture account, according to the complaint.

“Intuit has received notice of this complaint and is reviewing the matter,” a spokesperson wrote in an email. “We are proud to offer our employees best-in-class benefits designed to support health and financial well-being for themselves and their families. This includes helping them build long-term financial security through our 401(k) retirement plan, where we match $1.25 for every $1 contributed by regular full-time employees in the United States, up to 6% of the employee’s eligible pay.”

Allegations Considered ‘Implausible’ by Legal Experts

In both cases, the plaintiffs seek the “restoration” to the plan of amounts used to offset employer contributions, disgorgement of the assets and profits made by the plan sponsors’ use of the money that would have been contributed, attorneys’ fees and other equitable relief.

Marcia Wagner, founder and managing partner of the Wagner Law Group, which is not involved in either case, said almost all defined contribution plans permit forfeitures to be used to reduce future employer contributions or to pay reasonable expenses, and some plans also permit, as a third alternative, allocating forfeitures among plan participants. She added that she would be surprised if these lawsuits are successful.

“For there to be a prohibited transaction under ERISA, the relevant plan fiduciary must know or should have known that the transaction was prohibited, and in view of this long-standing practice been approved by the IRS for inclusion in tax qualified plans, such an allegation would be implausible,” Wagner wrote in an emailed response. “From an ERISA fiduciary perspective, the language of a plan document must be followed unless it is improper, is inconsistent with the terms of the plan or violates ERISA.”

Wagner said the only basis for a challenge would be if the use of the forfeitures to reduce employer contributions is inconsistent with ERISA’s exclusive benefit requirement. However, she said that statutory language does not prohibit an employer from receiving some benefit from a transaction.

If the complaints are successful, Wagner said “potential implications would be great,” because of how widespread and longstanding the existing practices for the application of forfeitures are.

Compliance October 11, 2023

SECURE 2.0: Provisions, Mandates and Uncertainties

Experts review the road map for current and upcoming dates of the retirement legislation.

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The SECURE 2.0 Act of 2022 was passed just before the start of this year. But more implementations will debut in 2024, meaning plan sponsors, advisers and recordkeepers are preparing for what’s next.

A group of experts speaking at the PLANSONSOR Roadmap Livestream discussed both current and upcoming SECURE 2.0 mandates and provisions and the many questions that still need answering.

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Already in Place

Most of the more than 90 provisions in SECURE 2.0 were, thankfully, not effective immediately, but instead pushed to 2024 or beyond, Jared Butler, a senior ERISA consultant with the Institutional Investor Group, told the virtual audience.

Even so, plan sponsors should already be complying with a few provisions that are both mandatory and optional he said. The most impactful of those was the increase to the required minimum distribution age, which went from 72 to 73 for 2023; it will be raised again to age 75 in 2033.

“Practically speaking, what that means is that anyone turning 72 this year does not need to take a required minimum distribution” from their retirement, Butler said.

Since some people may not have been aware, the Internal Revenue Service did issue a notice giving some wiggle room, Butler noted, with participants able to return mistaken RMDs to their plan or a Roth individual retirement account.

Other elements of SECURE 2.0 that were in place this year, Butler said, included:

  • A reduction in the excise tax for a missed RMD, which had previously been 50%. That was reduced to 25% and then reduced even further to 10% if addressed in a timely fashion;
  • SECURE 2.0 waived a 10% early withdrawal penalty for participants who have a terminal illness that will occur within an 84-month period;
  • Official guidance was issued that a participant hit by a federally-declared natural disaster could take a distribution of up to $22,000 with no penalty;
  • There is also an optional employer match to be treated as Roth—or pre-tax—money, Butler said. But there is not a lot of detail in SECURE 2.0 on how that can be handled from a tax reporting standpoint. “While that is technically available, I’m not aware of anyone offering it,” Butler said, noting that there is interest from plan sponsors.

2024 Administration

When it comes to 2024, the good news is that there are “really only a couple of mandatory provisions” that plan sponsors must be mindful of, especially after a mandatory Roth catch-up provision was pushed out two years, said Catherine Ellis, an institutional adviser at CAPTRUST.

The first key provision, she noted, relates to Roth plan distribution roles. Currently they are treated like a “traditional distribution” from a retirement plan, meaning a participant has to take an RMD at 73.

Beginning in 2024, SECURE 2.0 will allow in-plan Roth savings to be treated as they are in an IRA, Ellis said. That means there is no RMD requirement for Roth savings within a plan. Additionally, a surviving spouse of an employee will be “treated like the employee going forward for the purpose of the distribution,” Ellis said. That allows the spouse to take distributions from the plan, as opposed to taking it as a lump sum.

Beyond this mandatory provision for plan sponsors, there are a number of “optional” provisions that, whether plan sponsors are ready to implement or not, should be under discussion. These include, according to Ellis:

  • An emergency savings program that could be set aside after taxes for up to $2,500 that could be withdrawn at any time in an emergency. “It’s a linked account, it’s treated a little more like a Roth,” Ellis explained. But “what we don’t understand yet is how those will be administered, what the burden may be on the plan sponsors to administer those types of features for the participants and what additional cost measures there may be by allowing the feature to be built in or linked to the retirement plan.”
  • An emergency withdrawal feature that will be available for participants to take up to $1,000 out of retirement savings through self-certification that it is for an emergency. There are no penalties or taxes on the withdrawal, so long as it is paid back within three years, Ellis explained.
  • Plan sponsors can also provide a company match in a retirement plan for a participant’s student loan payment. This provision, however, has “a lot of uncertainty” around it, Ellis said, ranging from the timing of how plan sponsors track it to how recordkeepers manage the matching.
  • An increase in the amount participants can withdraw if leaving a plan. Currently they can take up to $5,000, meaning any account with a balance lower than $5,000 can be swept out of the plan. In 2024, it increases to $7,000. This provision can help if small accounts are a “drag on your overall plan” if you have a lot of turnover, Ellis said.
  • Finally, participants who have been a victim of domestic abuse will be allowed to make a hardship withdrawal from their retirement plan without penalty.

“Many [of these provisions] are not yet available in your plan,” Ellis noted. She encouraged plan sponsors to reach out to their recordkeeper or adviser to ensure they are getting information on what is available.

Questions Remain

Summer Conley, a partner in Faegre Drinker Biddle & Reath LLP, noted that plan sponsors need to be active on 2024 provisions but have two years—until the end of 2025—before needing to amend plan documents themselves.

Meanwhile, she joked that there are still open questions on “just about all” of the optional provisions in SECURE 2.0. Some of the key areas of uncertainty, she noted, include:

  • The student loan match. Conley noted that some plan sponsors want proof beyond self-certification that employees have made a student loan match. “They are looking for guidance on whether that’s possible,” she said. She also said there are questions about when employees need to certify that they have made the payment, because it may be after the plan sponsors need to do plan testing for compliance reasons.
  • Employers’ ability to make matching contributions as post-tax Roth. Those are supposed to be on “vested contributions,” Conley noted. “But it’s not clear if you have to be fully vested or if you can pay tax as it vests. That still raises questions as to how that is actually going to work.”
  • Emergency savings. , Conley said there are questions about what kinds of investments are available for it and if employees can participate in it even if they are ineligible for the retirement plan.

Conley and the other panelists agreed that plan sponsor clients are interested in enacting the provisions after they receive additional guidance.

“The biggest thing is that [plan sponsors] want to continue to have a dialogue,” Ellis, of CAPTRUST, said. “They are trying to vet out what they are not interested in considering so they can take it off the board. And they want to continue exploring more finitely the areas of potential interest.”

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