How to Stay Ahead of Retirement Plan Forfeitures and ERISA Lawsuits

Since September 2023, more than 80 class-action lawsuits have been filed against major U.S. companies and fiduciaries alleging the misuse of retirement plan forfeitures. The plaintiffs in these lawsuits allege that using forfeitures to offset future employer contributions violates the Employee Retirement Income Security Act of 1974 (ERISA). Most recently, in January 2026, the U.S. Department of Labor (“DOL”) reaffirmed its position on the plaintiffs’ forfeiture claims in a pending Ninth Circuit appeal where it sided with the employer and explained that using forfeitures to offset employer contributions does not violate ERISA so long as it is consistent with the plan’s terms.   

What are forfeitures?

Forfeitures happen when an employee leaves a company before meeting the company’s vesting requirements and becoming fully vested in employer contributions to a 401K plan or other retirement plan. When this happens, the non-vested amounts are considered forfeited funds that typically stay in the plan. Those funds can later be used to pay plan expenses, reduce or offset employer contributions, or they can be reallocated to current participant accounts. The plan may specify how the forfeitures are to be allocated, or it may give discretion to the plan fiduciary to choose how to allocate the forfeitures. 

The U.S. Department of the Treasury regulations, including proposed regulations issued in 2023, explicitly allow for the use of plan forfeitures to offset future employer contributions. ERISA is silent regarding the permitted use of forfeitures, and the DOL— which is tasked with primary enforcement of ERISA—has never asserted that the use of forfeitures to offset future employer contributions violates ERISA. Indeed, in amicus briefs filed in support of the defendants in two pending Ninth Circuit appeals—Hutchins v. HP, Inc. and Wright v. JPMorgan Chase & Co. —in July 2025 and January 2026 respectively, the DOL explained its position that the use of forfeitures to offset future employer contributions does not violate ERISA so long as it is consistent with the plan’s terms.  

Plaintiffs’ challenges 

Several recent putative class actions allege that the longstanding practice of using forfeitures to offset future employer contributions is unlawful. Plaintiffs allege that plan fiduciaries breach their ERISA fiduciary duties of loyalty and prudence as well as other ERISA provisions when they permit forfeitures to be used in this manner. They argue that this practice allegedly prioritizes and benefits the employer’s financial interests over the best interests of plan participants.

Court rulings to date

To date, there have been 31 decisions on motions to dismiss, six of which are now on appeal. Most courts have rejected the plaintiffs’ theory that the use of forfeitures to offset employer contributions rather than pay plan expenses is always unlawful because, among other things, plaintiffs are not entitled to benefits beyond what they are promised under the plan. 

Plan fiduciaries have not been as successful at the motion to dismiss stage when the complaint alleges that the use of forfeitures violated the terms of the plan. In other instances, the district court decisions turn on what the plan language says about the permitted or mandated uses of forfeitures. 

Decisions are more divided when plan documents give fiduciaries discretion over how to use forfeitures. Some courts read this discretionary language strictly and hold that claims alleging fiduciaries were required to use forfeitures to pay administrative expenses conflict with plan terms that grant fiduciaries the choice. Other courts conclude that even where a plan grants discretion, mere compliance with plan terms does not necessarily satisfy fiduciary obligations, and therefore plaintiffs have plausibly alleged breaches of ERISA fiduciary duties.

As yet, no district court has had the opportunity to rule on the merits of the claim at summary judgment or trial. 

How to stay ahead

Given the evolving legal landscape regarding plan forfeitures, it is important for companies to mitigate risk and protect against potential litigation. Some of those strategies include:

• Review plan language: Plan sponsors and fiduciaries should ensure that they understand what the plan provides regarding the use of forfeitures. Plan sponsors may also consider amending their plans to require that forfeitures first reduce employer contributions and, if any remain, be applied to administrative expenses.
• Assess plan communications: Plan sponsors and fiduciaries should review participant communications, including summary plan descriptions, to assess how forfeiture allocations are explained to plan participants and to ensure consistency with what the plan says.
• Review ancillary documents: Plan sponsors and fiduciaries should also review other documents that describe forfeiture allocation, including Form 5500 filings (the plan’s annual reports submitted to federal agencies) and recordkeeper agreements, to ensure that all descriptions of forfeiture practices are consistent with the plan.
• Conduct audits: Plan fiduciaries should conduct regular audits to ensure forfeitures are being used in accordance with the plan document and applicable law.
• Be transparent: Plan sponsors should ensure transparent communications with plan participants regarding the forfeiture process and how forfeitures are to be used.
• Stay informed: Plan sponsors and fiduciaries should continue to monitor the developments in this area as other district courts and the federal appellate courts weigh in on the plaintiffs’ theories of liability.