Two recent judicial decisions may throw cold water on the newest trend in ERISA litigation, plan sponsors' use of forfeitures. Multiple lawsuits have claimed that plan sponsors use of forfeitures to reduce employer contributions, rather than using them to reduce participant-level costs, is a breach of fiduciary duty. Motions to dismiss were granted by district court judges in two of these cases, Madrigal v. Kaiser Foundation Health Plan and Sievert v. Knight-Swift Transportation Holdings.
The use of forfeitures to offset employer contributions is clearly permitted by IRS rules. Plaintiffs claim that even though reducing employer contributions is allowed, that option is not the best option for plan participants. They assert that reducing participant-level fees, or returning forfeitures to plan participants is in the best interests of plan participants and that offsetting employer contributions is in the best interests of the plan sponsor. The judge in Kaiser disagreed, writing that ‘participants have received their promised benefits,’ and that ERISA does not require a plan sponsor to maximize benefits beyond what is required in the plan.
The use of forfeitures to reduce employer contributions is a common and acceptable practice. These dismissals are hopefully the beginning of a judicial trend that will quickly end these frivolous claims.
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