A California federal judge recently refused to dismiss a lawsuit against Intuit in which retirement plan participants claim that the company misused forfeited funds from its 401(k) plan. The denial of the bulk of Intuit's motion to dismiss kept the core claims of the lawsuit intact, illustrating how 401(k) forfeiture suits under the Employment Retirement Income Security Act (ERISA) are gaining momentum in some federal courts. U.S. District Court Judge P. Casey Pitts allowed the breach of fiduciary duties of prudence and loyalty under ERISA based on the claim that Intuit used the unvested forfeited funds toward matching new employees' 401(k) contributions instead of lowering overall plan costs. The judge also declined to dismiss the claim that the company's forfeiture spending was a prohibited transaction under ERISA.
The ruling comes on the heels of a similar ruling against Qualcomm in an adjacent federal court. In that case, U.S. District Court Judge Roger T. Benitez denied Qualcomm's motion to dismiss similar allegations that challenged how the company utilized former employees' forfeited 401(k) matching funds.
Settlor Function vs. Fiduciary Function in the Disposition of Forfeited Funds
In the Intuit case, Judge Pitts rejected the employer's argument that the disposition of forfeited funds was a so-called "settlor function" as opposed to a fiduciary function falling under the auspices of ERISA. Intuit and other employers have based this argument on the fact that no binding precedent exists regarding whether utilizing forfeited funds is a settlor function. However, Judge Pitts found that since the employer had discretion under the plan to apply the forfeited funds, which had become plan assets, Rodriguez alleged that Intuit had acted as a fiduciary sufficiently to survive a motion to dismiss.
Furthermore, Judge Pitts cited several decisions involving union benefit plans in discussing the settlor vs. fiduciary function argument. In those cases, decisions regarding the disposition of plan assets were fiduciary functions. Likewise, the judge cited Waller v. Blue Cross of California, a case in which the U.S. Court of Appeals for the Ninth Circuit found that actions related to the management and disposition of plan assets constituted a fiduciary function under ERISA.
Although no cases involving 401(k) plans have addressed this question, the comparison to other benefits plans has caused some ERISA attorneys to advise their clients to remove discretionary language concerning forfeited funds from their plans. In other words, employers might consider amending plans to dictate how forfeited funds are allocated, leaving them with no discretion regarding their utilization.
Prohibited Transaction Claim
The court's rejection of the employer's settlor function vs. fiduciary function argument also weakened the employer's argument that the plaintiff's prohibited transaction claim as to the forfeiture spending should be dismissed. As a result, Judge Pitts refused to dismiss the prohibited transaction claim, in which the plaintiff claimed that Intuit improperly used the forfeited funds as a substitution for future employer contributions to the plan.
Intuit argued that the U.S. Supreme Court's ruling in Lockheed v. Spink meant that a prohibited transaction claim could not include forfeiture spending. Judge Pitts distinguished Lockheed from the case at issue, as that case involved early retirement programs and a waiver of claims under ERISA and the Age Discrimination in Employment Act.
Nonetheless, although the judges upheld the plaintiff's prohibited transaction claim in the Intuit and Qualcomm cases, a judge in a similar lawsuit against HP dismissed the same type of claim earlier this year.
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