An Update to Forfeiture Funds and Fiduciary Duty: A Collision Course
Over the past two years, more than 70 lawsuits have been filed against plan sponsors alleging fiduciary breaches related to the use of 401(k) forfeiture funds. These cases are testing the boundaries of ERISA’s duty of loyalty and raising fundamental questions about how plan fiduciaries should balance IRS guidance with ERISA’s fiduciary standards.
One of the most core principals of ERSIA is that fiduciaries must always act in the best interest of their participants. Every decision must be made with the participants interest in mind and it is a prohibited transaction if a fiduciary makes a decision that would be deemed to not be in the best interest of the participants. This is often referred to as the “Duty of Loyalty.”
Recent lawsuits involving the use of 401(k) forfeiture funds are bringing new questions about this key issue in ERISA fiduciary law. They are challenging whether plan fiduciaries acted appropriately when using forfeiture funds to offset employer matching contributions, rather than prioritizing plan expenses or reallocating the funds to participants’ accounts.
These suits are challenging whether fiduciaries can rely solely on plan documents or IRS allowances when making forfeiture allocation decisions. Plan Sponsors argue they are following IRS guidance, while plaintiffs contend that such practices are inconsistent with ERISA’s clearly laid out fiduciary obligations, which would supersede IRS guidance. Courts are now tasked with determining whether the fiduciaries’ actions align with their obligations under ERISA or if the decisions improperly served employers’ financial interests.
Use of Forfeiture Funds
Forfeitures occur when employees leave before becoming fully vested in their employer’s contributions. IRS regulations allow forfeitures to be used for three purposes:
(1) to pay plan expenses,
(2) to reduce employer contributions, or
(3) to allocate additional funds to participants.
Although the IRS has always allowed forfeitures to be used for any of the above, plaintiffs are now arguing that using forfeitures to fund employer matching contributions breaches ERISA’s fiduciary duties of loyalty and prudence. They allege that the companies made this decision in order to save the company money (not because it was in the best interest of the participants). They argue that this decision saved the company money (by reducing the amount they had to pay in order to fund the match) and that therefore the company benefited but the participants did not.
Current Notable Court Cases
The initial wave of notable lawsuits raising these issues include the cases below.
Perez-Cruet v. Qualcomm Inc. (Case No. 3:23-cv-01890, S.D. Cal.)
Qualcomm is accused of using over $1.2 million in forfeitures annually to offset its matching contributions.
After the court denied Qualcomm’s motion to dismiss in May 2024, the parties reached a confidential settlement in early 2025, bringing the case to a close. The settlement is believed to have been in excess of $1 million.
Hutchins v. HP Inc. (Case No. 23-cv-5875, N.D. Cal.)
Plaintiffs argued HP misused forfeitures to reduce its own contributions instead of covering administrative expenses.
In August (2024), the court dismissed the claims, finding HP’s actions aligned with IRS guidance. The plaintiffs are currently appealing the decision.
On July 9, 2025, the U.S. Department of Labor (DOL) filed an amicus brief in support of HP Inc., marking a significant development in this area. In its brief, the DOL emphasized that plan fiduciaries may appropriately rely on plan terms and IRS regulations when determining how to apply forfeitures, so long as the decision is made prudently and in good faith. The agency argued that using forfeitures to offset employer matching contributions does not inherently breach ERISA’s fiduciary duties when it aligns with the plan’s written provisions.
(See: DOL Amicus Brief, Hutchins v. HP Inc., July 9, 2025: https://benefitslink.com/src/ctop/hutchins-v-hp-9thcir-dol-amicus-07092025.pdf)
Rodriguez v. Intuit Inc. (Case No. 5:23-cv-05053, N.D. Cal.)
The lawsuit challenges Intuit’s reallocation of forfeitures to reduce its contributions rather than benefiting participants. In August (2024), the court rejected Intuit’s argument that the decisions were purely “settlor” functions, ruling that fiduciary duties still apply.
The parties settled the lawsuit, with Intuit agreeing to pay just under $2 million in April 2025.
Becerra v. Bank of America (Case No. 3:24-cv-00921, W.D.N.C)
In another recent suit, Bank of America is accused of breaching its fiduciary duty by using forfeited funds to reduce matching obligations instead of reallocating them to participants or paying plan costs that the participants would have otherwise borne. Plaintiffs are arguing that this harmed participants by reducing overall plan assets. Undoubtedly, Bank of America will try to have the lawsuit dismissed, and will likely site the DOL Amicus Brief, Hutchins v. HP Inc.
This case is currently ongoing and still in discovery as of November 2025.
Summary
Across this growing wave of litigation, plaintiffs argue that ERISA’s fiduciary duty of loyalty requires plan sponsors to prioritize participants’ interests over cost-saving measures for employers. Meanwhile, defendants maintain that IRS guidance and plan documents explicitly authorize their forfeiture practices, and that compliance with those standards is consistent with ERISA obligations.
The DOL’s July 2025 amicus brief in Hutchins v. HP Inc. marks a potential turning point, as it signals regulatory support for fiduciaries who follow written plan terms and federal guidance in good faith. The outcome of these cases will likely shape future plan administration practices and clarify the interplay between ERISA’s fiduciary duties and tax compliance rules.
Written by Michael Davis
Michael Davis has been in the retirement plan industry since 1994 and is the Vice President of Sales at CRS. He can be reached via email at mdavis@crs401k.com.