San Diego, CA – On May 24, the Southern District of California denied Qualcomm Inc.’s motion to dismiss a class action 401k lawsuit brought by participants in the Qualcomm Incorporated Employee Savings and Retirement Plan. Perez-Cruet v. Qualcomm, Inc. alleges that Qualcomm violated the fiduciary duty and anti-inurement provisions of ERISA by using the forfeited money to reduce future employer matching contributions instead of eliminating the expenses that were charged to participant accounts.
This is a new frontier in 401k fiduciary lawsuits, and plan participants are taking notice. There also seem to be internal conflicts in the law and regulations, which may ultimately work to protect retirement savers.
How the money moved
The Qualcomm plan is a defined contribution, individual account, employee pension benefit plan governed by ERISA. It is funded by a combination of salary and wage contributions by plan participants and company contributions. Both are held in a trust fund for the benefit of workers when they retire. However, the two streams of money are handled differently in the years before retirement.
Participants are immediately vested in their own contributions and the investment earnings that money generates. On the other hand, participants become entitled to or “vest” in only half of the company’s contributions and earnings generated by those funds on the first anniversary of the worker’s hire date. It is not until the second anniversary that the participant becomes entitled to 100 percent of the contribution and earnings.
When participants leave before they are fully vested in the company contributions, they forfeit the unvested balance. The terms of the plan provide that “forfeitures shall be used at the discretion of the company to reduce the company contributions next payable under the plan or applied to plan administrative expenses.” Qualcomm has consistently used the forfeited amounts to reduce its required matching contributions. The lawsuit focuses on the three plan years from 2019 to 2021.
In 2019, Qualcomm’s contributions to the plan were reduced by $1,060,000 as a result of the reallocation of forfeited funds. In 2020, company contributions were reduced by $1,222,000, and in 2021 by $1,222,072. None of the forfeited amounts were used to reduce the administrative expenses paid from each participant’s account. All went toward reducing the employer match.
For example, in its May 2024 denial of the Motion to Dismiss, the court found that per participant expenses were $44 in the 2021 plan year. Had Qualcomm used the forfeited $1,222,072 to pay administrative expenses, participants would have paid nothing. Forty-four dollars can seem like a small amount of money, but when that cost recurs year after year, it can amount to a sizeable sum, especially when lost investment earnings are considered.
Yet, the plan document seems to allow for this reallocation. So, what’s wrong?
ERISA or IRS regulations?
Under Section 404 of ERISA , one of the duties of a plan fiduciary is to “act ‘solely in the interest of the participants’ and for the ‘exclusive purpose’ of providing benefits to those participants.” This general principle also implies that the assets of a pension plan may never inure to the benefit of the employer. The plan participants assert that Qualcomm violated both principles by using forfeited money as a substitute for the company’s own future contributions.
Recently, however, the Department of Treasury proposed explicit guidance that a defined contribution pension plan may use forfeited funds to reduce an employer’s future contributions. The proposed language would give plans, like Qualcomm’s, the choice of using forfeited contributions for an employer’s future contributions. But the rule has not yet been adopted and, as the court’s denial points out, does not have the force of law.
At the summary judgment phase of litigation, a plaintiff need not conclusively prove an allegation. It is enough that the allegation is legally plausible. The District Court found that the plaintiffs had met this minimal burden.
Common practice
Many plan sponsors have an established practice of using forfeited funds to reduce their required contributions to the plan. This practice has come under increasing scrutiny, however, and some benefits attorneys predict a wave of new ERISA lawsuits. Intuit and Clorox have filed motions to dismiss similar lawsuits, arguing that the participant-plaintiffs suffered no injury because they received all the benefits required by the plan documents. Other similar fiduciary breach lawsuits have been filed against Tetra Tech Inc., Honeywell, Thermo Fisher Scientific Inc. and Mattel. These challenges could become a major factor in ERISA litigation in the second half of 2024.
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