Judge dismisses Honeywell 401(k) forfeiture lawsuit as courts remain split over sponsors' plan management

A federal judge in Newark, N.J. has dismissed a lawsuit against Honeywell International and its fiduciaries by a former 401(k) plan participant, further adding to the divided rulings among different judges over how sponsors use employer contributions forfeited by participants before they are fully vested for matching funds.

Forfeitures have become a major concern for the retirement industry, and they will continue to affect plan management in 2025, according to Pension & Investments' recent defined contribution outlook report.

Sponsors say they are following rules set by the Internal Revenue Service. Plaintiffs’ lawyers say the forfeiture policies violate sponsors’ fiduciary duties under ERISA.

More than two dozen forfeiture lawsuits have been filed since September 2023. At least 10 have been filed since October 2024.

Honeywell is the fifth employer to win a federal district court dismissal. The others are HP, Thermo Fisher Scientific, Clorox and BAE Systems.

Two employers - Intuit and Qualcomm - have had federal judges reject their motions to dismiss. One federal judge ruled that a forfeiture lawsuit against Tetra Tech should be addressed by arbitration.

And in November, the John Muir Health hospital system agreed to settle a lawsuit by a 401(k) plan participant who alleged ERISA violations of high record-keeping fees and poor investment choices as well as mishandling of forfeited funds.

Like other forfeiture lawsuits, the complaint in Barragan vs. Honeywell International Inc. et al., filed in February 2024, said ERISA's rules for fiduciary duty trump the Internal Revenue Service's rules for managing forfeited funds.

The IRS says sponsors can use the forfeited funds to reduce plan expenses or to reduce employer contributions to retirement plans. (Participants' contributions of their own money are not affected by forfeiture rules)

Honeywell participants are immediately vested with their own contributions to the 401(k) plan, but there is a three-year vesting period for company contributions to reach 100% vesting, said the lawsuit, which sought class-action status.

"Defendants exercise discretionary authority and control over how these (forfeited) plan assets are reallocated," the lawsuit said. "Defendants have consistently failed to use the forfeited funds to pay plan administrative expenses."

However, U.S. District Court Judge Evelyn Padin rejected the plaintiff's argument on Dec. 19 as a "broad theory" that failed address "context and circumstances," a guideline established by the U.S. Supreme Court for assessing ERISA lawsuits.

The judge rejected the plaintiff's argument that the Honeywell forfeiture policy was a prohibited transaction under ERISA. "The complaint fails to plausibly allege a prohibited transaction," the judge wrote.
The Honeywell 401(k) Plan, Charlotte, N.C., had assets of $15.4 billion as of Dec. 31, 2023, according to the latest Form 5500.

In the John Muir Health lawsuit, a former employee sued in Oakland, Calif. federal court in March 2024 claiming excessive record keeping fees, too many record keepers, and too many investment options.

The plaintiff alleged the plan and its fiduciaries engaged in self-dealing through a forfeiture policy that favored reducing employer contributions rather than plan expenses. A participant is fully vested for employer contributions after five years, according to Nado vs. John Muir Health et al.

The parties announced a preliminary agreement Nov. 15 in a document filed by the plaintiff's attorneys in a U.S. District Court in Oakland. In addition to paying $950,000, defendants agreed to conduct a record-keeping RFP within two years of a court-approved settlement. The agreement was achieved via mediation.

"The defendants are not objecting to this preliminary motion for class action settlement approval," the document said. "At a minimum continuing the litigation would have resulted in complex and costly proceedings, and significantly delayed any relief to the class."

The John Muir Health 403(b) Plan, Walnut Creek, Calif., had assets of $1.24 billion as of Dec. 31, 2023, according to the latest Form 5500.