HP sued over use of forfeited 401(k) retirement contributions

If IT giant loses this lawsuit, it might just upset every plan in America

HP Inc has been accused of improperly using funds set aside for retired workers.

The lawsuit [PDF], filed on behalf of plaintiff Paul Hutchins in a US federal court in northern California, claims HP has taken forfeited funds – money the IT giant pledged to contribute to workers' 401(k) pots but unclaimed because employees left before their vesting periods – and used the money for its own benefit rather than keeping the cash in the staff retirement plan.

In America, it's still relatively common for employers, particularly large ones, to match some portion of the amount employees contribute from their own paychecks to their 401(k) retirement accounts.

The HP 401(k) Plan, a defined contribution retirement plan, offers to fully match up to four percent of an employee's eligible earnings for each pay period. So an employee earning $100,000 per year who opted to set aside $4,000 annually would be given another $4,000 by HP.

But those matching funds would not be fully paid by HP until three years later – the vesting period. The lawsuit is about what happens to undistributed funds forfeited by employees who left before that deadline.

Under America's Employee Retirement Income Security Act of 1974 (ERISA), funds allocated to a qualified retirement plan can be used to provide benefits to plan participants or to pay for administrative expenses. The question raised by the plaintiff – which others say has long-been settled – is whether companies can use forfeited funds to cover pending corporate obligations to employees.

The complaint, citing ERISA's "anti-inurement" provision, claims that such funds cannot be used for the benefit of the employer. It says, "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan."

In short, once a business has set aside money for employee retirement benefits, those funds can not be used to pay current corporate liabilities.

According to the complaint, HP has used millions of dollars of forfeited funds over the past few years to cover contributions it would otherwise have made to employees. And in so doing, it has allegedly violated its fiduciary duty to its employees.

Two other lawsuits filed in recent months – Dimou v. Thermo Fisher Scientific, Inc. and Rodriguez v. Intuit – have made similar allegations about corporations reclaiming forfeited retirement contributions for their own benefit. But legal experts have expressed skepticism about the way the plaintiffs are interpreting the law.

Groom Law Group last month wrote, "The claims are surprising given that the use of forfeitures to offset employer contributions is well established and widespread. In fact, the longstanding practice is explicitly permitted under Treasury regulations and is consistent with Department of Labor guidance."

The use of forfeitures to offset employer contributions is well established and widespread

In March, the IRS issued a proposal for rulemaking to clarify how forfeited funds can be used. The language used there endorses the use of such funds "to reduce employer contributions under the plan."

Brian Pinheiro, practice leader of Ballard Spahr's employee benefits and executive compensation group, told The Register that the IRS rulemaking has more to do with how long money can sit in a forfeiture account before it's used and that employer usage of forfeited funds has long been allowed.

"The guidance from the IRS for decades has been that forfeiture accounts, which are accounts that hold assets not allocated to any individual, can use that money to pay plan expenses, to reduce future employer contributions, and to reallocate it among plan participants," he said.

Pinheiro said it would be hard to imagine the courts agreeing with the plaintiff's interpretation. "If there is merit to these claims, it would change the way most plans in this country run," he said.

HP and attorneys with Hayes Pawlenko, representing the plaintiff, did not immediately respond to requests for comment. ®

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