There has been a rash of lawsuits recently challenging how forfeitures are used in retirement plans. (Forfeitures are the amounts remaining when the unvested portion of a participant’s account is forfeited.) The novel theory in these suits — a purported misuse of discretion in the application of forfeitures — has recently gained some steam and legitimacy after surviving a motion to dismiss in Perez-Cruet v. Qualcomm. Employers with retirement plans that provide discretion over the use of forfeitures should consider making a simple plan design change to avoid being a litigation target.
The following excerpt from the complaint in Qualcomm illustrates the type of claim that is being brought:
At the discretion of Defendants, forfeited nonvested accounts may be used to pay the Plan’s administrative expenses or reduce the Company’s contributions to the Plan. Although Defendants have discretion to use the forfeited funds to…