Rising Tide of 401(k) Forfeiture Suits Reaches Appellate Level

Nearly 100 lawsuits have been filed challenging how employers use 401(k) contributions left behind by departing workers. One of them is about to be the first argued before a US appeals court.

The cases from this two-year surge assert a novel legal theory: that companies violate the Employee Retirement Income Security Act when they choose to use this forfeited money to fund their required plan contributions instead of lowering the administrative expenses paid by workers.

After a slew of lower court decisions largely favoring the employers, the US Court of Appeals for the Eighth Circuit Wednesday will take up the arguments of Wells Fargo & Co. worker Thomas Matula, who contends that in using those funds to defray its own obligations, the bank is effectively self-dealing. The Ninth Circuit is expected to go next, with arguments in a case against HP Inc. scheduled for May 20.

With similar appeals filed in three other circuits and dozens of cases pending in district courts, the first appellate decision on 401(k) forfeitures could be widely influential.

“Because this is such a novel issue and this might be the first appeals court to weigh in, this is significant and would be something other courts would look to,” Monica Perkowski, an attorney with Holland & Knight LLP in Atlanta, said.

Dismissal Orders

More than two dozen companies have won court orders dismissing 401(k) forfeiture allegations, including Home Depot Inc., Northrop Grumman Corp., and AT&T Services Inc. Some of the decisions rejecting these cases have focused on the fact that the Internal Revenue Service has long approved of employers using 401(k) forfeitures—the employer contributions that can be forfeited when a worker leaves their position after a few months or years—to fund their plan contributions.

“In terms of numbers, it’s not gone well for the plaintiffs in these cases,” Bret Busacker, a partner with Dorsey & Whitney LLP in Boise, Idaho, said.

But some judges have bucked this trend, greenlighting claims against Bank of America Corp., Qualcomm Inc., W.W. Grainger Inc. and a handful of others. These decisions have credited the idea that a retirement plan fiduciary acts disloyally when it takes money that could have benefited workers and instead use it to benefit the employer sponsoring the plan.

There’s a “split of authority” in which courts are “looking at the same sets of allegations and facts and reaching different decisions,” Brock Specht, a partner with Nichols Kaster PLLP in Minneapolis, said.

The specific language used in a 401(k) plan document has emerged as a key factor, with some courts focusing on whether the plan mandates a certain use for forfeitures, or whether fiduciaries are given leeway to decide.

Courts have been reluctant to recognize a sweeping rule on how forfeitures should be used, and lawsuits that have been narrowly tailored to the specific language in a given plan document have tended to be more successful, Sprecht said.

Uphill Battle

The Eighth Circuit will be the first appeals court to hear arguments on forfeitures, but that doesn’t ensure it will issue the first decision.

The Ninth Circuit is weighing appeals against JPMorgan Chase & Co., Amazon.com Services LLC, and Nordstrom Inc., while appeals against Siemens Corp. and Honeywell International Inc. have been fully briefed by the parties in the Third Circuit. Employees of RTX Corp. and Northrop Grumman Corp. have appealed to the Fourth Circuit, and the Sixth Circuit is reviewing a case against Meijer Inc.

The employees bringing these appeals likely face an “uphill battle,” Busacker said.

“I personally do not think these are strong cases, and I would suspect the appeals courts will rule in favor of defendants,” he said.

A victory for the workers would likely require an appeals court to determine that a practice long considered permissible by the IRS—using 401(k) forfeitures to fund employer contributions—can be a fiduciary breach under ERISA, which Busacker said would be “hard to square.”

Another obstacle facing the workers is the US Labor Department, which filed amicus briefs urging courts to reject appeals against HP, Siemens, Honeywell, and JPMorgan—a noteworthy Trump-era shift from the department’s usual practice of backing workers in ERISA cases.

“Based on how the decisions have come out at the district court level, I want to say we’d get an opinion that’s favorable to defendants at the appeals court level, but you just never know,” Perkowski said.

Looking Ahead

The forfeiture suits could spur the appeals courts to address several questions on which benefits attorneys have sought clarity.

Guidance on ERISA’s duty of loyalty, which has produced less case law than other parts of the statute, would be particularly welcome, Sprecht said. That—which requires plan fiduciaries to act in participants’ best interests and without an eye toward benefiting anyone else—tends to be “a bit squishier” than the more frequently-litigated duty of prudence, which requires fiduciaries to act with care and skill in managing plan assets, he said.

The forfeiture cases are, “at their heart, loyalty claims, because the plan administrator is accused of using assets in a way that benefits the plan sponsor, rather than using it to benefit participants,” he said.

The courts also could flesh out the longstanding ERISA dichotomy between actions an employer takes as the “settlor” of a benefit plan and actions taken as a plan fiduciary. Unlike fiduciary actions that involve exercising discretion, settlor actions—which include upfront decisions about how plans are structured and what benefits are offered—typically aren’t subject to liability under the statute.

“A lot of the time we have confusion between what the settlor functions and fiduciary functions are under ERISA,” H&K’s Perkowski said. “Settlor functions are part of plan design and fiduciary functions are plan administration, and a lot of time those concepts get mixed up in forfeiture litigation, so having more guidance and clarity would be helpful.”

“It’s really kind of wait-and-see for now,” she said.

The case is Matula v. Wells Fargo & Co., 8th Cir., No. 25-2441, oral arguments 3/18/26.