401(k) lawsuits over ‘forfeited’ money get a lifeline

investmentnews.com:

A new type of 401(k) lawsuit recently survived its first big challenge, paving the way for others like it – and potential settlements.

The case alleges that telecommunications company Qualcomm ran afoul of the Employee Retirement Income Security Act by using “forfeited” 401(k) money to pay for company contributions to workers’ accounts rather than offsetting some of the administrative costs that all participants pay. The line of litigation has surprised benefits lawyers, since the Internal Revenue Service has allowed employers to use such 401(k) contributions that way, as long the plans’ documents permit it. The money is the employer contribution that employees forfeit when they leave their jobs before certain vesting milestones. In Qualcomm’s case, workers become 50 percent vested for employer contributions on their first anniversary and 100 percent on the second, according to court documents.

Since one law firm began filing those cases last year, observers said they did not expect the cases to go very far. However, there are reportedly at least nine such lawsuits now pending, and the recent development in the Qualcomm case represents a tailwind for the plaintiffs. On May 24, the judge presiding over that case denied the defendant’s motion to dismiss, which means that the plaintiffs cleared a major hurdle. Some of the other companies that have been sued are HP, Honeywell, Clorox, Mattel, Intuit, and Thermo Fisher Scientific.

“No one has seen this claim before… although the tax code has allow this sort of [use of forfeited plan assets] for so many years,” said Sherrie Boutwell, partner at Boutwell Fay. “Getting past a motion to dismiss really means every plan sponsor should be taking a look at this – they should take a