Novel ERISA Suit Challenging Employer's Use of Forfeited 401(k) Funds Moves Forward
In the first suit of its kind, a California federal district court judge refused to dismiss a suit against Qualcomm Inc. by retired workers, who alleged that the company had misspent forfeited 401(k) funds obtained when workers left the company before the employer match to their 401(k) plan had fully vested. The former workers claimed that Qualcomm violated the Employment Retirement Income Security Act (ERISA) by breaching its fiduciary duty to plan participants and violating the statute's anti-inurement provision, which bars it from benefitting from the workers' plan assets.
The case is Perez-Cruet v. Qualcomm Inc. et al., case number 3:23-cv-01890, U.S. District Court for the Southern District of California.
In its motion to dismiss, Qualcomm argued that it did not violate ERISA by spending the forfeited funds to reduce employer contributions to other employees' accounts rather than lower fees for the entire plan. Qualcomm pointed out that its actions aligned with industry standards, the IRS, and its plan terms.
Another issue for litigation is whether an employer's decision to allocate forfeited funds is a function subject to ERISA's fiduciary duties. Employers argue that it is merely a settlor function or administrative activity not subject to their fiduciary duties under ERISA and, therefore, cannot be the basis for an ERISA violation.
Since the judge ruled that the Perez-Cruet case could move forward, another California district court recently filed a new ERISA case challenging the use of forfeited 401(k) funds. The outcome of these cases thus far has been mixed, with one facing a motion to dismiss and a judge granting a motion to compel arbitration in another. However, with this case surviving dismissal, more cases on this subject are likely to be filed.
Ninth Circuit Clarifies Pleading Standards for Federal Mental Health Parity Claims
The Ninth Circuit partially reversed the dismissal of a lawsuit against UnitedHealth and its subsidiaries by employee plan participants alleging the systematic denial of their mental health and substance use disorder treatment claims. A panel of the Ninth Circuit found that the district court erred in finding that the lead plaintiff had failed to allege a violation of federal mental health parity laws.
In its decision, the Ninth Circuit also reversed the dismissal of a breach of fiduciary duty claim under ERISA. However, the Court did not disturb the dismissal of a denial of benefits claim. The case is Ryan S. v. UnitedHealth Group Inc. et al., Case Number 22-55761, U.S. Court of Appeals for the Ninth Circuit.
Although unpublished, the decision adds to the limited legal authority to interpret the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Act. This law requires that treatment limitations on behavioral health claims be no stricter than those for medical claims.
The Ninth Circuit followed other circuits in finding that mental health parity suits require proof that the plan administrator's internal claims process always results in denying claims. Instead, the plaintiff only must prove that the process has impacted the decision to deny a claim. Furthermore, the Court ruled that should the suit proceed to class certification, reprocessing could be an appropriate equitable remedy for individuals whose claims were denied due to the challenged review process.
Second Circuit Refuses to Force Arbitration of ERISA Class Action
The Second Circuit became the fourth circuit court (joining the Third, Seventh, and Tenth Circuits) to deny an employer's motion to compel individual arbitration of an ERISA class action suit involving alleged mismanagement of an employee stock ownership plan (ESOP). The case is Dejesus Cedeno v. Argent Trust Co. et al., case number 21-2891, U.S. Court of Appeals for the Second Circuit.
Employee Ramon Dejesus Cedeno filed the proposed class action against Strategic Financial Solutions, his debt relief company employer, its senior executives and their companies, and Argent Trust Co., the trustee for Strategic's ESOP, in November 2020. Dejesus Cedeno alleged that the companies and their executives cost plan participants millions when they overcharged the ESOP in a $242 million sale of company stock.
One judge issued a strong dissenting opinion favoring compelling arbitration, which employer-side attorneys have embraced. Furthermore, the Ninth Circuit compelled individual arbitration in an ERISA class action suit in a partially unpublished opinion in 2019. Legal experts wondered if a circuit split existed sufficient for the U.S. Supreme Court to address the issue. However, some judges have questioned the "effective vindication doctrine" under the Federal Arbitration Act that judges have relied upon in denying arbitration in these cases. This doctrine might spur the high Court to accept an ERISA arbitration denial case amid differing opinions on whether it has ever applied the doctrine in any of its previous opinions.
Third Circuit Revives 401(k) Mismanagement Suit
The Third Circuit reversed a Pennsylvania district court judge's 2021 dismissal of a 401(k)-mismanagement suit, in which that Court found that the plaintiffs' suit lacked sufficient recordkeeping fee comparisons. The case is Mator et al. v. Wesco Distribution Inc. et al., case number 22-2552, U.S. Court of Appeals for the Third Circuit.
Wesco Distribution Inc. retirement plan participants Robert and Nancy Mator filed suit, claiming that it charged excessive recordkeeping fees compared to other plans of comparable size and value. Upon review following dismissal at the district court level, the Third Circuit ruled that even flawed fee calculations and comparisons were enough to survive dismissal and move to the discovery stage of litigation.
The ruling rejects the notion that all plans and services used for comparative purposes must be identical to be valid. In contrast, showing a wide fee disparity between plans with only minor differences in the services provided is sufficient.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.