Employers tasked with reallocating 401(k) assets forfeited by former employees are encountering a wave of litigation alleging the misuse of plan funds, alongside emerging judicial disagreements regarding the viability of such suits.
The appetite for litigation has risen over plan sponsors’ use of forfeited funds to pay their own contributions rather than offset workers’ costs. This is happening despite existing and proposed US Treasury Department regulations that appear to allow this type of usage. Recently, HP Inc., which used unvested 401(k) cash to fund its other required plan contributions, successfully defeated class action claims when a US District Court ruled in its favor on June 17, 2024. The details of this decision can be found here.
These legal battles are notably complex, as conflicting decisions from various courts create an unpredictable landscape for employers attempting to navigate these issues. For instance, some judges have supported the view that using forfeited funds for sponsor contributions aligns with Treasury regulations, while others have sided with plaintiffs who argue that such practices constitute a misuse of plan assets.
As these cases continue to unfold, the legal community is watching closely for any rulings that may set a clearer precedent. Until then, employers must carefully consider the legal ramifications of their 401(k) reallocation strategies to avoid potential litigation and ensure compliance with both current regulations and evolving judicial interpretations. For a deeper understanding of this ongoing issue, more information can be found in the original article here.