Department Of Labor Weighs In On 401(k) Forfeiture Class Actions

Highlights

• Since September 2023, plaintiffs have filed numerous class action lawsuits alleging that the use of 401(k) forfeitures to offset future employer contributions violates the Employee Retirement Income Security Act of 1974 (ERISA). As the 401(k) forfeiture class action litigation approaches the two-year mark, a positive trend has emerged for plan sponsors, with the majority of district courts to have considered these claims siding with defendants on motions to dismiss.
• So far, three of the dismissed cases are up on appeal in the U.S. Court of Appeals for the Ninth Circuit. The U.S. Department of Labor (DOL) recently weighed in for the first time on plaintiffs' forfeiture claims in its amicus brief filed in one of the Ninth Circuit appeals – Hutchins v. HP Inc. The DOL sided with the defendant plan sponsor and noted that the plaintiff's theory misconstrues settlor and fiduciary principles and is contrary to decades of established understanding that forfeitures may be allocated to offset future employer contributions rather than to defray administrative expenses.
• Additional decisions on motions to dismiss have been issued in the last month. These decisions continue to focus on the language of plan provisions that detail the permitted or mandated uses of forfeitures in evaluating plaintiffs' claims.
• Employers and plan fiduciaries should continue to proactively review their plan language to ensure that the use of forfeitures is consistent with plan terms and applicable laws. In addition, employers and plan fiduciaries should inventory their forfeitures and develop a plan to ensure that forfeitures are used in a compliant and timely way (i.e., by the Dec. 31, 2025, deadline established by the U.S. Department of the Treasury's 2023 proposed regulations).

The last month has been a busy one in the 401(k) forfeiture class action litigation space, as the U.S. Department of Labor (DOL) weighed in for the first time on plaintiffs' forfeiture claims in its amicus brief filed in the Hutchins v. HP Inc. appeal pending in the U.S. Court of Appeals for the Ninth Circuit and with additional decisions issued on the defendants' motions to dismiss. While courts continue to disagree over how to handle the plaintiffs' theory – that the use of 401(k) forfeitures to offset future employer contributions violates several provisions of Employee Retirement Income Security Act (ERISA) – plan sponsors and plan fiduciaries might have cause for some cautious optimism, as the tide seems to be turning in the defendants' favor on these claims.

As Holland & Knight previously discussed, plaintiffs in 401(k) forfeiture cases generally allege that the use of 401(k) forfeitures to offset future employer contributions violates several ERISA provisions, including the fiduciary duties of loyalty and prudence, duty to monitor and ERISA's anti-inurement provision. Plaintiffs have also alleged that this practice constitutes a prohibited transaction under ERISA. So far, there have been several mixed decisions on motions to dismiss.

Notably for plan sponsors and fiduciaries, the DOL recently filed an amicus brief in the Ninth Circuit Hutchins case, arguing in favor of the defendant plan sponsor.¹ The DOL noted that "[t]he established understanding for several decades has been that defined contribution plans ... may allocate forfeited employer contributions to pay benefits for remaining participants rather than using those funds to defray administrative expenses."² The DOL further stated that while "[t]he Secretary has not previously spoken directly to this issue ... [t]he Secretary has a substantial interest in fostering established standards of conduct for fiduciaries by clarifying the Secretary's view that a fiduciary's use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA."³

Additional developments in 401(k) forfeiture litigation include recent decisions out of the U.S. District Court for the Western District of Washington and U.S. District Court for the Central District of Illinois, which highlight the courts' conflicting approaches to defendants' motions to dismiss plaintiffs' forfeiture claims. On June 23, 2025, the Western District of Washington in McWashington v. Nordstrom, Inc.⁴ granted the defendants' motion to dismiss a proposed class action alleging, among other claims, that the defendants 1) breached their fiduciary duties of loyalty and prudence, 2) breached their duty to monitor and 3) engaged in a prohibited transaction by failing to use forfeitures to defray the plan's administrative expenses.⁵ The court rejected the plaintiffs' theory as "overly simplistic," "implausible" and as an "incorrect" reading of the plan document because, under the plaintiffs' theory, forfeited funds "could never be used to reduce [the company's] contributions to the Plan because doing so would constitute a breach of fiduciary duty."⁶

A week later, the Central District of Illinois in Buescher v. North American Lighting, Inc.⁷ went the other way. The court denied the defendants' motion to dismiss the plaintiff's forfeiture claims, including claims for breaches of the ERISA fiduciary duties of loyalty and prudence, breach of the duty to monitor and prohibited transaction claim. The court distinguished recent decisions where courts dismissed similar claims on the basis that the plaintiffs' theory in those cases was overbroad. The court highlighted that, in contrast, "[p]laintiff in this case only contends that the discretionary choice to apply forfeitures toward employer contributions was, in this instance, a fiduciary breach."⁸ Buescher also highlights a new argument asserted by plaintiffs in recent cases – a breach of the ERISA fiduciary duty of prudence claim based on the failure to timely exhaust forfeitures as required by the IRS and U.S. Department of the Treasury.

Ninth Circuit Will Be First Circuit Court to Decide on Plaintiffs' 401(k) Forfeiture Claims

The Ninth Circuit will be the first circuit court to consider plaintiffs' 401(k) forfeiture theories in one of three dismissed cases currently up on appeal, including Hutchins.⁹ As Holland & Knight previously discussed, in Hutchins, the U.S. District Court for the Northern District of California dismissed the plaintiff's claims challenging the plan's use of forfeited employer 401(k) contributions, including the plaintiff's claims for breach of the ERISA fiduciary duties of loyalty and prudence and prohibited transaction claim.

Plaintiff's Arguments On Appeal

In the appeal, the plaintiff challenges the district court's reading of the plan document that allowed the company, as settlor, to decide whether, in a given year, forfeitures will be used to pay plan expenses.¹⁰ Like in the district court, the plaintiff argued that the company acted as a fiduciary (and not settlor) when it "directed that the expenses be paid with assets in participants' accounts rather than forfeitures," notwithstanding the fact that the plan gives the company, as settlor, the choice of whether at least some forfeitures will be used to pay plan expenses.¹¹

Next, the plaintiff argued that the company "failed to act in the interest of participants" and, thus, violated its fiduciary duties of loyalty and prudence because "over a period of several years, it uniformly chose to reallocate all forfeitures to further its own self-interest" by reducing its own contributions.¹² The plaintiff argued that these allegations were enough to "support a reasonable inference that HP breached its fiduciary duties" and, thus, sufficient to survive a motion to dismiss under the Twombly/Iqbal pleading standard.¹³

The plaintiff also argued that he was not seeking an additional benefit that the plan did not offer. To that end, the plaintiff argued that, under his theory, there would be no circumstance where "using forfeitures to pay Plan expenses ever increase [the Company's] contributions above the level [the Company] agreed to pay into the Plan. ... Nor would it ever require [the Company], as opposed to the Plan's trust fund, to pay Plan expenses."¹⁴

In addition, the plaintiff dismissed the "decades of settled law" that allow for the use of forfeitures to offset employer contributions by arguing that, although the practice is allowed, it does not "relieve fiduciaries of their duty to act in the participants' best interests."¹⁵

DOL Weighs in on Merits of Plaintiff's Arguments and Backs Use of Forfeitures to Offset Employer Contributions

On July 9, 2025, the DOL filed an amicus brief supporting the defendant plan sponsor in Hutchins.¹⁶ The DOL noted that it had chosen to speak on this issue because it "has a substantial interest in fostering established standards of conduct for fiduciaries by clarifying the Secretary's view that a fiduciary's use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA."¹⁷

The DOL explained that the plaintiff's argument contradicts "[t]he established understanding for several decades ... that defined contribution plans ... may allocate forfeited employer contributions to pay benefits for remaining participants rather than using those funds to defray administrative expenses."¹⁸

Next, the DOL explained that, while it agreed with the district court's finding that the company's decision on how to allocate 401(k) forfeitures was a fiduciary function,¹⁹ that decision was "tightly constrained by settlor decisions regarding 1) Plan funding and design, and 2) the risks of a dispute with the Plan sponsor."²⁰ To that end, the DOL explained that funding a plan, including "decisions relating to the timing and amount of contributions," was a settlor function reserved for the plan sponsor – a principle that is confirmed by case law and the terms of the company's plan.²¹ The DOL emphasized the company's plan "make[s] clear that the plan sponsor, as settlor, is solely responsible for funding matching contributions and determining whether plan expenses are paid by the sponsor or out of the plan trust."²²

Applying the settlor versus fiduciary discussion to the facts of the Hutchins case, the DOL explained that "the mere fact that the HP Plan Committee decided to use Plan forfeitures to fund matching contribution benefits – an option explicitly granted by the Plan document and the proposed Treasury Department regulation – does not state a plausible claim for breach."²³

The DOL then explained that the plaintiff's allegations were inadequate to state claims for breaches of the fiduciary duties of loyalty and prudence. With respect to the duty of loyalty, the DOL noted that the plaintiff's "only allegation specific to the alleged breach of this duty is that the HP Plan Committee had a 'conflict of interest' between the sponsor and the participants in making its forfeiture allocation decision."²⁴ The DOL clarified that this was a "mere potential conflict of interest," which is not enough to state a plausible claim for breach of the fiduciary duty of loyalty.²⁵

With respect to the duty of prudence, the DOL explained that "Plaintiff's only allegation to support a claim for breach of this duty is the bare assertion that HP 'utilized an imprudent and flawed process' to decide how to allocate forfeitures and 'failed to undertake any investigation.'"²⁶ The DOL concluded that "[w]hile these fiduciary duties apply to the HP Plan Committee's forfeiture allocation decision, the fundamental problem with Plaintiff's fiduciary breach claims is that they ignore the constraints on the fiduciary's decision-making that are evident from the face of the complaint and the Plan's terms."²⁷

The DOL also rejected the plaintiff's argument that by using plan forfeitures to pay administrative expenses, "the fiduciary could have compelled the sponsor to increase its contributions."²⁸ Rather, as explained by the DOL:

District Courts Continue to Issue Conflicting Decisions

Western District of Washington Dismisses 401(k) Forfeiture Claims

In McWashington v. Nordstrom, Inc., the plaintiffs alleged that the company failed to use 401(k) forfeitures to lower expenses for plan participants and instead used that money to fund its own contributions to the plan.³⁰ Based on this theory, the plaintiffs asserted claims for breaches of ERISA fiduciary duties of loyalty and prudence, a prohibited transaction claim and a claim for failure to adequately monitor fiduciaries in connection with allocation of forfeitures. The court rejected the plaintiffs' arguments as a "misinterpretation of the Plan's terms" and "an incognizable theory of liability," and dismissed the plaintiffs' claims with prejudice.³¹

First, focusing on the language in the plan, the court concluded that the plaintiffs' reading of the plan was "incorrect as a matter of law."³² The court noted that the plan dictates that forfeited funds must be applied first to restore benefits to participants or beneficiaries who have rejoined or reestablished contact with the plan, and then to reduce the company's contributions to the plan.³³ Any remaining funds can then be used to pay administrative expenses.³⁴ Thus, the court found that the plaintiffs' theory that "funds in the 'forfeiture suspense account' could never be used to reduce [the company's] contributions to the Plan ... improperly renders a portion of the [plan] superfluous."³⁵

Next, relying on other district court decisions that considered similar claims – including the Hutchins decision³⁶ – the court found that "the premise underlying plaintiffs' forfeiture-related causes of action is implausible."³⁷ To that end, the court noted that the plaintiffs' theory that "re-allocating 'forfeiture suspense account' funds to reduce [the company's] contributions was per se imprudent, runs contrary to the principle that 'the content of the duty of prudence turns on the circumstances ... prevailing at the time the fiduciary acts' and 'the appropriate inquiry will necessarily be context specific.'"³⁸ The plaintiffs' theory allowed "for no set of circumstances and no context in which a prudent and loyal course of action would be to apply amounts in the 'forfeiture suspense account' toward the matching contributions due from" the company.³⁹

Finally, similar to other district courts that have previously dismissed similar claims, the court referenced the Treasury Department's proposed regulations⁴⁰ and the long-standing practice of using forfeitures to pay future employer contributions in holding that "to state a plausible claim of imprudence and/or disloyalty, [plaintiffs must] plead something more than an ordinary use of forfeited funds to pay future employer contributions, or in other words, behavior that is not consistent with the practices of perhaps all 401(k) plan fiduciaries."⁴¹

Central District of Illinois Allows 401(k) Forfeiture Claims to Proceed

In Buescher v. North American Lighting, Inc, the Central District of Illinois considered the same forfeiture claims as in McWashington – namely, breach of ERISA fiduciary duties of loyalty and prudence claims, a prohibited transaction claim and breach of duty to monitor claim – but came out the other way and denied the defendants' motion to dismiss.⁴²

The plaintiff challenged the company's decision to use forfeitures to offset nonelective contributions instead of using them to defray plan expenses.⁴³ In response, the defendants asserted similar arguments as have been asserted in other forfeiture suits, including that 1) the plan permits allocation of forfeitures to offset employer contributions and 2) this practice is allowed by applicable law.⁴⁴

The court rejected each of the defendants' arguments as "premised upon a misunderstanding (or mischaracterization) of [p]laintiff's allegations and arguments."⁴⁵ Specifically, the court rejected the defendants' core argument that "[a]ccording to [p]laintiff, forfeitures can never be used to offset employer contributions."⁴⁶ Instead, the court found that "[p]laintiff has expressly alleged that proper allocation of forfeitures is a context-dependent inquiry, and that allocation toward offsetting employer contributions may at least sometimes be in the best interests of the participants."⁴⁷ Thus, the plaintiff's theory was "not the 'swing for the fences' argument rejected as overbroad in Hutchins."⁴⁸

An Emerging Potential Theory of Liability: Untimely Forfeiture Exhaustion

The plaintiff's allegations in Buescher largely track what has been seen in other forfeiture cases but with one notable exception – the Buescher plaintiff also alleged a breach of ERISA fiduciary duty of prudence claim premised on a theory that the defendants violated the IRS and Treasury Department rules that require forfeitures to be used in a timely manner, and this failure "denie[d] plan participants additional benefits or reduced plan expenses."⁴⁹ In essence, the plaintiff alleged that "rolling over of forfeitures from year to year is imprudent."⁵⁰

The plaintiff's argument relies on the IRS' prior informal guidance that provided that forfeitures must be used or allocated in the plan year they were incurred.⁵¹ As highlighted by the plaintiff and court, the IRS publication states that "[t]he Code does not authorize forfeiture suspense accounts to hold unallocated monies beyond the plan year in which they arise."⁵²

In 2023, the Treasury Department issued proposed regulations for using forfeitures that extended the deadline by which plans must use forfeitures to the end of the plan year after the plan year in which the forfeitures were incurred. Specifically, the 2023 proposed regulations provide: "forfeitures incurred during any plan year that begins before January 1, 2024, are treated as having been incurred in the first plan year that begins on or after January 1, 2024."⁵³ In other words, forfeitures accumulated from 2024 or earlier should be used or allocated by Dec. 31, 2025, for any plan that employs a calendar year plan year.

The Buescher court ultimately denied the defendants' motion to dismiss the plaintiff's breach of the fiduciary duty of prudence claim based on the untimely exhaustion theory. Specifically, the court rejected the defendants' argument that the plaintiff was attempting to bring a claim for violation of the IRS and related provisions.⁵⁴ In doing so, the court reasoned that the plaintiff "is not relying on the IRS publication above for its force of law, but rather for its underlying point: The failure to use forfeitures in a timely manner denies plan participants additional benefits or reduced plan expenses."⁵⁵

Conclusions and Considerations

The latest 401(k) forfeiture decisions and DOL's amicus brief reinforce what has been the core issue in the 401(k) forfeiture litigation space so far: the importance of reviewing what the plan document says with respect to the permitted or mandated uses of forfeitures. Plan fiduciaries should continue to proactively review their plan language in order to ensure compliance and present a strong defense in case of potential or future litigation.

In addition, plan fiduciaries should inventory the company's forfeitures and develop a plan to use the forfeitures in accordance with the plan by the Dec. 31, 2025, deadline established by the Treasury Department's 2023 proposed regulations. Although these proposed regulations have not been formally finalized or adopted, they make clear that the IRS and Treasury Department intend to enforce the rule that forfeitures must be used no later than 12 months after the end of the plan year in which they are incurred.

Footnotes

1 Hutchins v. HP Inc., No. 25-826 (9th Cir.), at ECF No. 24.1.

2 Id. at 1.

3 Id.

4 No. C24-1230 TSZ, 2025 WL 1736765, at *1 (W.D. Wash., June 23, 2025).

5 Id. at *13-14.

6 Id. at *13.

7 No. 24-cv-02076-CSB-EIL (C.D. Ill., June 30, 2025).

8 Id. at *24 (emphasis in original).

9 No. 25-826 (9th Cir., Feb. 7, 2025); see also Sievert v. Knight-Swift Transportation, No. 25-3409 (9th Cir., May 29, 2025); Wright v. JPMorgan Chase & Co., No. 25-4235 (9th Cir., July 9, 2025).

10 No. 25-826, ECF No. 10.1, at 15-17.

11 Id. at 17.

12 Id. at 20-27.

13 Id. at 29.

14 Id. at 34-35.

15 Id. at 13, 36.

16 No. 25-826, at ECF No. 24.1.

17 Id. at 1.

18 Id.

19 Id. at 14-15.

20 Id. at 11.

21 Id. at 13-14.

22 Id. at 14.

23 Id. at 15.

24 Id.

25 Id. at 9, 15-16.

26 Id. at 16.

27 Id.

28 Id. at 18.

29 Id. at 19.

30 2025 WL 1736765, at *13-14.

31 Id. at *15.

32 Id. at *14.

33 Id.

34 Id.

35 Id.

36 767 F. Supp. 3d 921 (N.D. Cal. Feb. 5, 2025).

37 2025 WL 1736765, at *14.

38 Id. (citations and quotation marks omitted; emphasis in original).

39 Id.

40 Use of Forfeitures in Qualified Retirement Plans, 88 Fed. Reg. 12282-01 (proposed Feb. 27, 2023).

41 2025 WL 1736765, at *14.

42 No. 24-cv-02076-CSB-EIL.

43 Id. at *20.

44 Id.

45 Id.

46 Id. at *20-21 (emphasis in original).

47 Id. at *22.

48 Id. at *24.

49 Id. at *34.

50 Id. at *35.

51 No. 24-cv-02076-CSB-EIL, at 33-34 (citing IRS Publication 4278).

52 Id.

53 Use of Forfeitures in Qualified Retirement Plans, 88 Fed. Reg. 12282-01.

54 No. 24-cv-02076-CSB-EIL, at *33-34.

55 Id. at *34.

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