Rodriguez v. Intuit alleged that the plan’s fiduciaries chose to use forfeited employer contributions for the company’s own benefit by reallocating nearly all of them to reduce required company contributions rather than using the money to pay plan expenses. Instead, the participants paid those expenses out of their own accounts, leaving them with less money for retirement.
Employee contributions and employer contributions
Participants contribute to the plan through wage withholdings deposited into the plan’s trust fund. Participants are always fully vested (or entitled to) their own contributions.
In addition, Intuit also contributed to the trust fund through matching contributions. For each year from 2018 through December 2021, Intuit made matching contributions on a pay period basis equal to 125 percent of up to 6 percent of the participant’s compensation. Participants vest in these matching contributions over time, up to five years. If a participant leaves the company before the required period of time, the unvested amount is forfeited back to Intuit. Short service employees could be entitled to some, but not all, of the employer contributions.
Under the terms of the plan’s governing document, the company may use those forfeited funds either to reduce its own future contributions or to pay plan expenses.
But what does ERISA say?
Section 404 of ERISA outlines the key duties of fiduciaries of employee benefit plans. It requires fiduciaries to act solely in the interest of participants and beneficiaries and to prioritize their interests. It further requires that fiduciaries exercise the care, skill, prudence, and diligence that a knowledgeable and experienced person would use when managing plan assets and making financial decisions.
Forfeitures always went to reduce employer contributions
From 2018 to 2021, the plan fiduciaries consistently chose to use the forfeited funds to reduce future company matching contributions to the plan. For example, in 2018, Intuit’s reallocation of forfeited nonvested funds reduced matching contributions by $4,704,000, leaving a balance of approximately $331,000 in the forfeiture account. No portion of the forfeitures was used to pay plan expenses that year, which totaled $730,948. In 2019 and 2020, Intuit acted similarly. Intuit allocated $74,000 of forfeited nonvested funds to pay plan expenses totaling $975,000 that year, leaving a balance of approximately $140,000 in the forfeiture account.
To be clear, it is always in the plan sponsor’s interest to use forfeited money to reduce its future contributions. It is almost always in the participants’ interest to use the forfeited contributions to pay plan administrative expenses.
Was Intuit’s decision legally okay?
On one hand, IRS rules permit employers to use forfeitures to reduce employer contributions. That guidance was more explicitly re-stated in proposed IRS regulations. Defined contribution plans may re-purpose forfeitures to:
- pay plan administrative expenses;
- reduce required employer contributions; or
- increase benefits in other participants’ accounts according to plan terms.
The Intuit plan document also explicitly permits the administrators to use forfeited contributions in this way.
On the other hand, the plain language of ERISA is about prioritizing the interests of plan participants and beneficiaries, which argues against using the money to reduce employer contributions, except in some (dire) circumstances. So, when would always allocating forfeited contributions to offset an employer’s obligations be okay? Is there a conflict between the guidance of Section 404 of ERISA and the more permissive IRS regulations?
That, of course, is the question.
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In its March Clorox decision, the Northern District focuses on process. Was there any indication that the Clorox plan fiduciaries consulted experts, ran the numbers, etc.? Was it a considered process that balanced the interests of participants and the plan sponsor?
In a gesture toward balance, the court suggested that, perhaps if the plan sponsor were seriously short of cash, it might be better for participants to allow it to use forfeitures (perhaps even consistently) to keep the plan alive.
Maybe not worth the risk
Intuit seems to have stepped back from this question. Is the Northern District trending in a participant-friendly direction? Perhaps. In the long run, would it just be better to pay the money to make the lawsuit go away?
Hate to be trite, but – we shall see.
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