Seyfarth Synopsis: Since September 2023, there have been at least 25 lawsuits filed claiming the ability to choose between using 401(k) forfeitures to reduce plan expenses or the plan sponsor’s contributions is a fiduciary choice, and that choosing to reduce the plan sponsor’s contributions constitutes a violation of ERISA’s fiduciary duties. In the latest decision in connection with a defendant’s motion to dismiss such a 401(k) plan forfeiture claim, in Barragan v. Honeywell Int’l, Inc. 24cv4529 (EP) (JRA), the United States District Court for the District of New Jersey (Judge Padin) granted defendant Honeywell’s motion and dismissed the plaintiff’s complaint without prejudice. This is the seventh decision on a motion to dismiss in a 401(k) plan forfeiture case, with only two cases surviving the motion. In Barragan, Judge Padin dismissed the case’s ERISA claims without prejudice, meaning the plaintiffs have an opportunity to revive the case with an amended complaint.
Similar to numerous other 401(k) forfeiture cases, the plaintiffs in Barragan argued that a decision to use the forfeitures to reduce the plan sponsor’s contributions violated ERISA’s fiduciary duties. The Honeywell plan provided that forfeited amounts could be applied: (1) to reduce a variety of employer contributions provided for under the plan, (2) to defray the plan’s administrative expenses, (3) to correct allocation errors, (4) to restore participant forfeitures, or (5) for any other purpose permitted under IRS rules. The plaintiffs argued that Honeywell always used forfeitures to reduce employer contributions, and that its decision to do so constituted a breach of ERISA’s fiduciary duties of loyalty and prudence, as well as a breach of the “anti-inurement” provision in section 403(c)(1) of ERISA (generally providing that “the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan), and a prohibited transaction under Section 406 of ERISA (both a transaction with a party in interest in violation of Section 406(a) of ERISA, and a prohibited use of plan assets by a plan fiduciary for its own benefit in violation of Section 406(b) of ERISA).
The threshold question in this motion was whether Honeywell’s decision regarding which of the plan’s permitted uses of forfeitures to choose was a “fiduciary” or “settlor” decision. The court concluded it was a fiduciary decision, noting that while a decision regarding what provision to include in a plan is a design decision made in a settlor capacity, the decision to use one authorized option in a plan rather than another was a fiduciary decision.
However, while the complaint adequately alleged Honeywell acted as a fiduciary, the court reasoned that the plaintiff’s allegation to the effect that any time a plan administrator chooses to use forfeitures to reduce employer contributions it violates its fiduciary duties under ERISA is so broad as to be implausible (implicitly accepting IRS guidance indicating that plan assets could be used to reduce employer contributions). Rather, the plaintiff had to plead particular circumstances or a particular context in this case that would render such use a breach of fiduciary duty.
Accordingly, the plaintiff’s first two claims, that Honeywell breached its duties of loyalty and prudence, were dismissed without prejudice, giving the plaintiff an opportunity to explain how the context and circumstances in this particular case render the decision to use forfeitures to reduce employer contributions disloyal or imprudent).
As for the claim that using forfeitures to reduce employer contributions violated ERISA’s anti-inurement provision, the court concluded, because “these forfeited amounts do not leave the Plan and are used to satisfy Honeywell’s obligations according to the Plan’s language . . . Honeywell is not acting in violation of the anti-inurement provision.” Again, the court dismissed the claim without prejudice.
Finally, the court concluded that the complaint did not plausibly allege a prohibited transaction under either Section 406(a) or 406(b) of ERISA, because the use of plan assets to reduce employer contributions did not constitute a “transaction” of the type prohibited by Section 406. The court concluded that such a transaction is a “commercial [bargain] that presents a special risk of plan underfunding” because it is between the plan and a plan insider, and presumably not at arm’s length. In this case, the court noted the “transaction” involved the reallocation of forfeitures to different participants and did not involve a transaction with a plan insider. Accordingly, the court dismissed the plaintiff’s prohibited transaction claims, again without prejudice.
The District of New Jersey court’s dismissal of the claims in Barragan represents another win for defendants in a series of 401(k) plan forfeiture cases. Still, there are two notable examples of courts refusing to grant motions to dismiss in these cases, the complaints and facts of each case differ, and so far the dismissals have been without prejudice. Whether plaintiffs will gain traction with these forfeiture suits remains very much an open question.
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