Yet another of the plan fiduciaries sued for offsetting employer contributions with forfeitures has moved to dismiss the suit for failure to state a claim—taking a different approach than other such motions to dismiss have thus far.
This is, of course, one of five suits[i] filed against[ii] large plan sponsors for “(1) breach of ERISA’s fiduciary duties, (2) violation of ERISA’s anti-inurement provision, and (3) engaging in self-dealing and transactions prohibited by ERISA.” But, in essence, the suits all allege that the decision to offset employer contributions with forfeitures—though permitted by the plan document—was an exercise of discretion that was not in the best interests of participants.
In response, a motion to dismiss the suit (Perez-Cruet v. Qualcomm Inc., S.D. Cal., No. 3:23-cv-01890, motion 1/5/24) by Qualcomm comments that the suit “alleges that Qualcomm should have departed from the language of the Plan—and from the Treasury Department regulation—to use forfeited contributions for a purpose other than reducing the Company’s contributions under the Plan so that Qualcomm has to contribute more to the Plan.” The motion goes on to comment that “this is not an obligation that is required by fiduciary duties or any other provision of ERISA”—and thus “Counts One through Six fail to state a claim and should be dismissed.”
Regulation Requirements
“Plaintiff does not challenge the Plan’s vesting schedule or its application to his account,” the motion notes. “He also does not allege that his account in the Plan should have been credited with employer contributions that he did not receive.” It continues “these claims fail as a matter of law. Most importantly, Treasury Department regulations explicitly require plans to use forfeitures in exactly the way the Plan.” As for that regulation, the motion notes that it “provides that any forfeitures ‘must be used as soon as possible to reduce the employer’s contributions under the plan.’”
This, the Qualcomm defendants maintain, amounts to an allegation that “Defendants used Plan forfeitures in exactly the way the existing regulation permits—indeed requires—them to be used.”
Beyond that, they cite that Treasury had recently issued a new proposed regulation permitting a defined contribution plan to use forfeitures “for one or more of the following purposes: (i) To pay plan administrative expenses; (ii) To reduce employer contributions under the plan; or (iii) To increase benefits in other participants’ accounts in accordance with plan”—and, if/when that proposal is finalized, “also will permit the very conduct Plaintiff challenges in this lawsuit.”
But while that might lie in the future, the motion states that “The existing regulation has been in place for decades. Yet neither Congress nor the Treasury Department has ever sought to modify it to prohibit using forfeitures to reduce employer contributions, as Plaintiff now claims is required.”
Plan Benefits
“As a matter of economics and math, the forfeiture amounts are monies that were contributed by Qualcomm to the accounts of unvested participants in the Plan that it turns out (in hindsight) Qualcomm did not owe them. It would be reasonable for those funds to be returned to Qualcomm as mistakenly paid,” the motion submits. “But Plaintiff does not allege that is what happened here. That is, Plaintiff does not allege that the forfeitures were taken out of the Plan and returned to Qualcomm. Instead, the forfeited funds remain in the Plan and are “reallocat[ed]” to other participants’ accounts.” This, they assert, means that the forfeitures remained in the plan as benefits—and “as the Supreme Court put it, because plaintiff ‘do[es] not allege that [defendants] used any of the assets for a purpose other than to pay its obligations to the Plan’s beneficiaries,’ there is no violation of ERISA.”
“The Complaint does not allege that the Plan terms required forfeitures to be used to reduce plan expenses,” the motion states. “Nor are ERISA’s prohibited transaction rules even implicated. There is no ‘transaction’ between a plan and some third party being challenged. Instead, Plaintiff alleges that forfeitures stay in the Plan and are reallocated to different participant accounts within the Plan”—something that the motion claims “does not qualify as a ‘transaction’ under ERISA’s prohibited transactions provision.”
Incidental Benefits
“The fact that Qualcomm may end up contributing less of its own money to the Plan because of how the forfeitures are used is irrelevant,” the motion asserts. “Moreover, the Supreme Court has made clear that ERISA does not proscribe actions that are otherwise lawful simply because they incidentally benefit the employer.”
“Indeed, Qualcomm does not need to contribute anything to the Plan; it could terminate the Plan or eliminate entirely its employer contributions. Lastly, and to state the obvious, if plans were always required to use forfeitures to reduce plan expenses—instead of (or before) using them to reduce employer contributions—the Treasury Department regulation that speaks to this precise issue would have said that. But it does not. Or the new proposed regulation would say that. And it does not either. As such, Claims One through Five fail to state a claim and should be dismissed.”
That’s what the motion says the suit does allege. But it also explains that “the Complaint does not allege that Plaintiff or any other participant received fewer contributions—employee or Qualcomm contributions—to their Plan account than called for under the Plan.”
We’ll see what the court has to say. Stay tuned.
[i] Suits have also been filed against the Thermo Fisher Scientific Inc. 401(k) Retirement Plan, Intuit, Clorox, and HP.
[ii] The participant-plaintiffs in all these suits are represented by a pair of lawyers from Hayes Pawlenko LLP, a South Pasadena, CA-based firm that positions themselves as an employment litigation firm “representing employees in disputes with their employers.”
