“If this is the law, then that would be news to Congress and the regulatory agencies, which have declared for decades that forfeitures can be used in this manner,” says a motion to dismiss a lawsuit alleging a fiduciary breach in offsetting employer contributions with forfeitures.
The motion to dismiss speaks to charges made in a suit filed against Intuit, less than two weeks after filing an identical action against the Thermo Fisher Scientific Inc. 401(k) Retirement Plan. This suit, filed in the Northern District of California, acknowledges that “the Plan provides that forfeited nonvested accounts may be used to pay Plan administrative expenses or reduce future Company matching contributions.” Its language mirrors almost exactly three other such suits filed in either the Northern or Southern districts in California, including Clorox, Qualcomm and HP.
More to the point, the motion to dismiss—filed in the U.S. District Court for the Northern District of California—asserts that the plaintiff here seeks to “manufacture a new type of ERISA claim by confusing and blurring the well-established distinction between settlor and fiduciary roles in retirement plans covered by ERISA.”
Document Detailed
As is the case in the other suits filed to date, the Intuit defendants note—and the plaintiff acknowledges—that the Plan’s governing plan document provides for the forfeiture, under certain circumstances, of non-vested matching contributions in participant accounts. One potential difference is that, during the period in question, Intuit actually modified its plan document—from language that said forfeitures “shall be applied, at [Intuit’s] election, to: (i) with respect to forfeitures of Matching Contributions or Safe Harbor Matching Contributions, reduce the Participating Employers’ obligation to make Safe Harbor Matching Contributions...”—to “permit for the first time the use of forfeitures to pay Plan expenses” in addition to those other options, at Intuit’s election.
That said, the motion to dismiss notes that, “The law is clear: When participants leave a retirement plan before fully vesting in their benefits, the employer contributions they forfeit as a result of their departure may be applied as an offset against the employer’s future contributions to the plan, if the plan’s governing document so provides. Such an offset is permissible under ERISA because, in an ERISA plan, the employer or ‘plan sponsor’ acts as the settlor of a trust and determines the level of contributions it will make to the plan. The extent to which forfeitures are used to satisfy employer contribution obligations merely reflects the employer’s decision, as settlor, regarding how much to contribute.”
Intuit’s argument is that the decision in how to apply forfeitures is administrative in nature, not fiduciary. Moreover, that it is a decision by Intuit, not the plan committee. They argue that the participant-plaintiff here seeks “to impose on plan fiduciaries an obligation to use forfeitures as a mechanism to increase the employer’s contributions, a realm that ERISA rightfully reserves to the plan sponsor.”
“Plaintiff’s fiduciary breach claims must be dismissed for the fundamental reason that she has failed to allege that either Intuit or the Committee ‘was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.’ Here, core ERISA principles, together with the plain language of the Plan Document, make clear that neither Defendant functioned as a fiduciary with respect to the action about which Plaintiff complains.”
And while it might seem a bit “inside baseball” for non-lawyers—in the business of dismissing lawsuits, alleging that the wrong party has been named is powerful. “Because Intuit—not the Committee—had responsibility under the Plan for deciding how forfeitures are to be used, Plaintiffs’ claims against the Committee must be dismissed because the Committee had no discretion with respect to the use of forfeitures. The entire Complaint is constructed around the premise that the Committee should have chosen to do something different with the Plan’s forfeitures.”
Settlor Sentiment
The motion goes on to state that “the fundamental flaw with Plaintiff’s theory is that decisions regarding plan funding are settlor decisions, not fiduciary decisions. As the Supreme Court has repeatedly made clear, ‘ERISA’s fiduciary duty requirement simply is not implicated where [an employer], acting as the Plan’s settlor, makes a decision regarding the form or structure of the Plan such as who is entitled to receive Plan benefits and in what amounts, or how such benefits are calculated.’”
They go on to point out that “for decades, it has been clear that forfeitures may be used to offset employer contributions. Ironically, Plaintiff comes to court claiming entitlement to the forfeitures of other participants, but, at the time ERISA was enacted in 1974, the Internal Revenue Code (the ‘Code’) expressly prohibited applying forfeitures to increase the benefits of remaining participants.” But they also note that “at all times, it has been permissible for an employer to use forfeitures to reduce future employer contributions if done in accordance with the plan document.”
Ultimately, they explain that “at all times, the Plan Document has reflected Intuit’s settlor determination as plan sponsor to provide a level of benefits based on contributions net of forfeitures. Plaintiff has no right to demand more benefits than the plan sponsor decided to provide or than the Plan terms require.”
‘Purely Speculative’
There is, of course, the question as to whether those reallocated forfeitures would have actually increased the benefits—an argument that the Intuit defendants here characterize as “purely speculative.” The motion notes that “Plaintiff pleads not a single fact to support her supposition about what would have happened in the future…that the suit ‘presupposes that, had a Plan fiduciary decided to allocate the forfeitures to administrative expenses, Intuit would have then increased its contributions to cover the difference and keep the benefit levels the same.’ However, ‘the Complaint is devoid of any fact offered in support of this assumption.’”
The motion goes on to note as “illogical” that the forfeitures are being “substituted” for Intuit’s contributions, when Intuit only ever committed to making contributions in an amount already offset by forfeitures. “The Complaint makes clear that the forfeitures went directly to pay benefits and/or administrative expenses. Despite Plaintiff’s characterization of the use of forfeitures to offset employer contributions as ‘for the Company’s own benefit,’ the undisputed reality is that contributions are how benefits get paid,” the motion states.
“Not only has Plaintiff failed to allege any fiduciary decisions regarding forfeitures, she has failed to allege a plausible claim that any breach occurred. She maintains that ‘Defendants’ (she does not differentiate between them) breached their fiduciary duties by failing to apply the forfeitures in a manner that would benefit the Plan rather than Intuit. The suggestion that ERISA required Defendants to apply the forfeitures to administrative expenses rather than employer contributions is without legal support,” the motion continues.
In essence, “Plaintiff has not alleged that the forfeiture allocation failed to comply with the terms of the Plan Document or that the terms were unlawful. Plaintiff does not dispute that she received the benefits promised by the terms of the Plan Document, and that is all the fiduciary is required to provide with the assets available under the Plan.”
The Implications
And if that were not enough, the Intuit defendants explained that “it is crucial to recognize the implications of the theory Plaintiff is proffering here. She lays out not a single fact unique to this Plan or its fiduciaries with respect to the offsetting of forfeitures against plan contributions. What she has alleged here could be alleged about any plan that permits forfeitures to be used in this manner. Plaintiff’s Complaint is thus founded on the proposition that using forfeitures to reduce employer contributions is always an impermissible inurement under ERISA. If this is the law, then that would be news to Congress and the regulatory agencies, which have declared for decades that forfeitures can be used in this manner. See supra, section II(A). Accepting Plaintiff’s argument would disrupt countless other plans that were structured in reasonable reliance on Congressional and agency guidance.”
“If she has stated a claim, then any plan that allows employer contributions to be offset by forfeitures is violating ERISA—even though Congress and the agencies have said for decades that offsetting employer contributions with forfeitures is permissible. Such an allegation is simply not plausible, and the Complaint must be dismissed.”
We’ll see what the court has to say. Stay tuned.
