DOL Backs Employers in 401(k) Forfeiture Lawsuits

The Department of Labor just threw a lifeline to small business owners facing costly 401(k) lawsuits. In January, the DOL filed an amicus brief supporting Honeywell International in a forfeiture reallocation lawsuit, marking the second time in six months the agency has defended employers against these increasingly common claims.

The case centers on how employers handle forfeited 401(k) contributions – money left behind when employees quit before they're fully vested. Plaintiffs argued that reallocating these funds violated ERISA's fiduciary rules, but the DOL disagrees.

What This Means for Your 401(k) Plan

The DOL's position is clear: deciding how to handle forfeited contributions according to your plan document is typically a "settlor function" – a business decision about plan design – not a fiduciary act that can trigger lawsuits. This distinction matters because fiduciary decisions face much stricter legal scrutiny.

For Long Island employers with 401(k) plans, this provides crucial protection. The DOL stated that "bare allegations" of improper forfeiture handling aren't enough to prove a fiduciary violation. Plaintiffs must show actual imprudence in how the money was managed, not just disagree with allocation choices.

This follows the DOL's broader shift toward supporting employers rather than encouraging litigation. As we covered previously, the agency has been offering more compliance assistance and fewer enforcement actions.

Understanding Forfeited Contributions

Forfeitures occur when employees leave before they're fully vested in employer matching contributions. Your plan document specifies how to handle this money – typically either reducing future employer contributions or paying plan expenses. Both approaches are generally acceptable under ERISA.

The key is ensuring your plan administrator follows the document's terms consistently. Problems arise when employers make ad hoc decisions about forfeitures without clear plan language or proper documentation.

Small businesses are particularly vulnerable to these lawsuits because they often lack the legal resources of larger companies. The DOL's supportive stance helps level the playing field by establishing that standard forfeiture practices don't automatically create liability.

Action Steps for Long Island Employers

Review your plan document to understand how it addresses forfeited contributions. If the language is unclear or outdated, consider updating it during your next plan year. Clear documentation protects against future challenges.

Ensure your plan administrator or payroll provider handles forfeitures according to the written procedures. Consistency is crucial – deviating from your own rules can create fiduciary issues even when the DOL supports your general approach.

For professional service firms, medical practices, and other Long Island businesses managing their own 401(k) decisions, proper ERISA compliance and fiduciary oversight remains essential even with this favorable DOL position.

Document your decision-making process. While the DOL brief provides important protection, maintaining records of how and why forfeiture decisions were made still serves as valuable evidence if questions arise.

The Bigger Picture

This development reflects the DOL's recognition that excessive litigation was creating a chilling effect on employer-sponsored retirement plans. By clarifying that routine plan administration isn't automatically a fiduciary violation, the agency is trying to preserve these valuable employee benefits.

However, this doesn't eliminate all fiduciary responsibilities. Plan sponsors still must act prudently when making discretionary decisions about investments, fees, and service providers. The protection applies specifically to following established plan terms for forfeitures.

Nassau and Suffolk County employers can feel more confident that standard 401(k) practices won't automatically trigger costly litigation, but proper plan governance remains important.

Compliance Note: Benefit plan rules and tax implications vary based on company size and location. This summary is for informational purposes only. Please contact your Benton Oakfield representative to review how these changes impact your specific plan documents.

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