The use of retirement plan forfeiture funds is at the center of a new lawsuit against the Humana Retirement Savings Plan, filed this month in federal court in the Western District of Kentucky. The plaintiff, Kathleen Smith, on behalf of herself and the class, asserts that plan fiduciaries breached their duties under the Employee Retirement Income Security Act (ERISA) by failing to implement and follow a prudent process for allocating forfeited plan funds in a manner loyal to participants.
Forfeitures are unvested employer contributions that become available when an employee leaves before fully vesting. These funds can be used to reduce employer contributions, cover plan administrative costs, or benefit other participants. Under ERISA, plan fiduciaries are required to act in the best interests of participants and beneficiaries, managing forfeitures prudently and loyally. Misusing these funds to primarily benefit the employer can violate ERISA and has sparked a wave of recent lawsuits, including this case against Humana.
The complaint alleges that plan fiduciaries violated ERISA’s anti-inurement provisions by allowing forfeited funds to benefit Humana rather than participants, and engaged in prohibited transactions by using forfeitures to reduce company contribution obligations instead of covering plan expenses or otherwise benefiting participants.
The lawsuit also points to a January 2025 amendment to the plan, which prioritized using forfeiture funds to reduce employer contributions while permitting any remaining amounts to cover plan expenses. The plaintiff argues this change underscores that the prior plan granted the administrator discretion to allocate funds between reducing employer contributions and defraying administrative expenses and supports the inference that prior conduct reflected imprudence and disloyalty in the exercise of duties by prioritizing offsetting company costs over the costs of the participants.
A recent surge of ERISA lawsuits has challenged how 401(k) forfeiture funds are managed. Courts have issued mixed rulings, and regulatory guidance from the Department of Labor and Treasury remains limited, creating ongoing uncertainty for plan sponsors. The financial and operational risks for plan sponsors are significant and include potential liability for lost plan assets, reputational damage, and increased administrative scrutiny. To mitigate these risks, experts advise reviewing plan language, clarifying forfeiture allocation policies, and documenting fiduciary decision-making to ensure participant interests remain the top priority.
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