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A number of lawsuits have recently been filed regarding the alleged misuse of forfeitures—but just a couple of months ago a plan was sued—and lost—a case brought by the Labor Department for not following the plan document’s forfeiture provisions.
According to the Labor Department, on Dec. 27, 2017, the agency filed a complaint in the U.S. District Court, Western District of Kentucky, Louisville Division, alleging that Sypris Solutions Inc.—a Louisville, KY technology services provider—and members of its retirement savings plan advisory committee failed to follow its own governing documents regarding the use of forfeiture funds for several of its 401(k) plans.
More specifically, the Labor Department alleged that from 2012 through 2015, the 401(k) plans’ governing documents required defendants to use forfeiture funds to pay plan expenses—but defendants used the forfeiture funds to reduce employer contributions to the plans. The Labor Department argued that in doing so, the employer benefited by reducing its contributions to the plans—at the expense of plan participants who saw their plan account balances reduced by payments of plan expenses from plan assets and not from forfeitures.
The Labor Department notes that on Sept. 28, 2023, Judge Benjamin Beaton issued a consent order and judgment ordering Sypris Solutions Inc. to restore $575,000 to the plan participants who were harmed by defendants’ use of the forfeiture funds. The company and the plan agreed to attempt to locate harmed participants who participated in the plans between 2012 through 2015 who are no longer in the plan and owed $250 or more, and pay $57,500 in penalties to the department.
Unlike the plans that have been targeted for their decisions regarding the use of forfeitures (all of which seem to have allowed for discretion in the application of forfeitures), this one appears to have made the decision to offset employer contributions in violation of clear language in the plan document that stipulated how those forfeitures were to be applied.
It’s a timely reminder that while the law may allow certain latitudes, the plan document can limit them.
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