BUESCHER v. NORTH AMERICAN LIGHTING INC (2025)

ORDER

Plaintiff, James R. Buescher, is a former employee of North American Lighting, Inc. (“NAL”). He has filed a putative class action Amended Complaint (#10) in which he raises two sets of claims pursuant to the Employee Retiree Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. In Counts I through IV, Plaintiff alleges that Defendants improperly allocated forfeitures under the NAL 401(k) Plan for their own benefit. In Counts V through VII, Plaintiff alleges that the NAL Health Plan violated the healthcare nondiscrimination mandates of ERISA.

Defendants in this matter are NAL, the NAL Board of Directors, the Administrative Committee of the NAL Command Plus Plan, and the Administrative Committee of the NAL Group Health and Life Insurance Plan. Collectively, Defendants have a filed a Motion to Dismiss (#13) all of Plaintiff's claims. Plaintiff filed a Response (#16) and Defendants filed a Reply (#18).¹ For the reasons set forth below, Defendants’ Motion to Dismiss (#13) is GRANTED in part and DENIED in part.

Ordinarily at this point, the court would set out all of the factual allegations in Plaintiff's Amended Complaint. However, Plaintiff's claims fall into two distinct sets; one set pertains to allocation of forfeitures under the NAL 401(k) Plan, and one set pertains to ERISA healthcare nondiscrimination mandates with respect to tobacco use surcharges. These sets of claims are complex and multi-faceted. More importantly, while both sets of claims arise under ERISA, there is very little factual overlap between those sets of claims. Accordingly, the court finds that that the more prudent and less confusing course of action will be to address one set of claims in their entirety before proceeding to the second set of claims.

Allocation of Forfeitures Under the NAL 401(k) Plan

The background facts that follow are taken from the allegations in Plaintiff's Amended Complaint and various documents relating to the NAL 401(k) Plan. Of note, those documents were not attached to the Amended Complaint in this case, but were provided by Defendants as exhibits accompanying their Motion to Dismiss. See 188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 735 (7th Cir. 2002) (“It is also well-settled in this circuit that documents attached to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to his claim. Such documents may be considered by a district court in ruling on the motion to dismiss.” (cleaned up)). At this stage of the proceedings, the court must accept as true all material allegations in the Amended Complaint, drawing all reasonable inferences therefrom in Plaintiff's favor. See Lewert v. P.F. Chang's China Bistro, Inc., 819 F.3d 963, 966 (7th Cir. 2016). To the extent there is any conflict between the allegations of the Amended Complaint and the documents, the court will rely on the documents, detailing the conflict only where relevant.

Finally, one additional note is necessary, concerning the nomenclature used in both sections of this Order. Plaintiff's two sets of claims involve two different “plans”: (1) the “NAL Command Plus Plan,” also referred to as the NAL 401(k) Plan; and (2) the “NAL Group Health and Life Insurance Plan,” also referred to as the NAL Health Plan. Whenever the court refers simply to a “Plan,” it is referring to the Plan at issue in that section of the Order. The same will be the case when the court refers to either of the Defendant Administrative Committees. Further, the court will primarily refer to Defendants collectively, unless specific reference to a single defendant is necessary or particularly helpful.

 Factual Allegations

NAL is a leading supplier of automotive lighting systems in North America. It operates a facility in Paris, Illinois. Plaintiff was employed at that facility as an engineering technician from January 2015 through September 2023.

The NAL 401(k) Plan is a defined contribution individual account plan sponsored and administrated by NAL. NAL delegated its administrative duties and responsibilities to the Administrative Committee of the NAL 401(k) Plan, which was appointed and is overseen by NAL and the Board. Plaintiff was a participant in the Plan from 2018 through the end of 2023, when he rolled his assets out of the Plan.

The Plan is funded by a combination of wage withholdings by Plan participants and NAL's contributions, each of which is deposited into the Plan's trust fund. Each participant's account is credited with the participant's contribution and an allocation of (1) NAL's contributions, (2) Plan earnings, and (3) forfeitures of terminated participants’ non-vested accounts.

NAL's contributions come in two forms: discretionary contributions and Qualified Nonelective Contributions (“QNECs”). Per the 2018 Summary Plan Description (“SPD”), “ ‘Discretionary’ means [NAL] choose[s] the amount of the contribution and whether or not it will be made.” QNECs, on the other hand, are nonelective. The total amount of the annual QNEC is 3% of a participant's eligible compensation (as defined by the Plan agreement) for the portion of the year they were an active participant.

Participants in the NAL 401(k) Plan are fully vested at all times with regard to their own contributions, QNECs, and earnings thereon. However, participants are subject to a six-year gradual vesting schedule with regard to discretionary contributions and earnings thereon, after which time they become 100% vested. If a participant has a break in service prior to full vesting, the participant forfeits the balance of unvested NAL discretionary contributions in their individual account.

These forfeited assets are called forfeitures. Defendants exercise discretionary authority and control over how forfeitures are thereafter reallocated. Under Section 3.05 of the Plan, effective January 1, 2018, “forfeitures may be used to pay administrative expenses or to reduce Employer Contributions ․ made after the Forfeitures are determined.” Similarly, the 2018 SPD states: “An amount you lose the right to is called a forfeiture. Forfeitures may first be used to pay plan expenses or to offset our contributions we make to the plan. If any forfeitures still remain, such forfeitures will be reallocated.”

Unless Defendants choose to allocate the forfeitures to defray Plan expenses, the Plan's expenses are charged to participants’ accounts. In 2018 and 2019, participants were charged a fixed amount of between $54 to $65 per year for plan administrative services. From 2020 through 2022, administrative service costs in similar amounts were defrayed through the allocation of forfeitures.

In 2018, NAL's nonelective contributions (i.e., QNECs) to the Plan were reduced by $328,940 as a result of Defendants’ reallocation of forfeited funds for NAL's own benefit. In 2019, NAL's nonelective contributions to the Plan were reduced by $596,506 as a result of Defendants’ reallocation of forfeited funds for NAL's own benefit. Plaintiff alleges that nonelective contributions were reduced from 2020 through 2022 as well, though in those years, such reductions would have occurred after forfeitures had been used to defray administrative expenses. In total, from 2018 through 2022, Defendants used forfeited funds to reduce NAL's contributions to the NAL 401(k) Plan by at least $1,941,474.

Plaintiff alleges: “The Audited Financials to the Plan 5500 Forms[² ] from 2018-2022 all state: ‘Forfeited amounts may be used to reduce future employer contributions or pay administrative expenses of the Plan. Forfeitures shall be used to offset future employer contributions.’ ” (Emphasis added by Plaintiff). But Defendants have attached to their Motion the Form 5500s for each Plan year, including the accompanying audited financials. The language quoted by Plaintiff appears only in the documents relating to 2020 through 2022.³ For years 2018 and 2019, the final line states: “Forfeitures shall be deemed to be employer contributions.”

The audited financials include footnotes that contain, among other things, statements of annual forfeiture totals. For instance, the audited financials accompanying the 2019 form 5500 state: “At December 31, 2019 and 2018, forfeited non-vested accounts totaled $693,728 and $596,506, respectively.” In 2020, the same document stated: “At December 31, 2020 and 2019, forfeited non-vested accounts totaled $693,728 and $596,506, respectively.” And in 2021: “At December 31, 2021 and 2020, forfeited non-vested amounts totaled $79,305 and $242,995, respectively.”

Plaintiff alleges that these footnotes “show a year-end balance in the forfeiture balance [sic] which is a violation of IRS/Treasury rules.”⁴ Specifically, he asserts that “Defendants’ imprudence in failing to exhaust Plan forfeitures in a timely manner” from 2018 through 2022 resulted in more than $200,000 in losses by Plan participants.

Plaintiff alleges that using forfeitures to offset its own contributions would always be in NAL's best interest because it would decrease NAL's own contribution costs. Plaintiff concedes in the Amended Complaint that “[t]his option might also be in the best interests of participants where there is a risk that NAL may be financially unable to satisfy its matching or discretionary contribution obligations.” Absent such a risk, however, the use of forfeitures to pay Plan expenses is in participants’ best interests, as it would reduce or eliminate the amounts that would otherwise be charged from their accounts to cover such expenses.

Plaintiff maintains that the decision to either use forfeitures to benefit NAL or to benefit participants creates a conflict of interest for Defendants. Moreover, Plaintiff alleges that “Defendants have consistently and reflexively chosen to use the forfeitures for their own interest, to the detriment of the Plan and its participants, by allocating all forfeitures toward reducing NAL's outstanding and unpaid contributions owing to the Plan.” Plaintiff asserts that NAL was at no risk of default from 2018 through 2022, such that there can be no justification for its choices with respect to allocation of forfeitures other than self-interest.

 Analysis

Plaintiff contends that the NAL 401(k) Administrative Committee was acting in a fiduciary capacity when it made the discretionary determination of how forfeitures would be allocated from year to year. In deciding to allocate those forfeitures toward offsetting NAL's nonelective contributions, rather than toward payment of Plan expenses, the Committee made a decision that was of no benefit to Plan participants and beneficiaries, but solely benefitted NAL by effectively reducing its contribution obligations. From this central thesis Plaintiff derives four separate claims.

In Count I, Plaintiff alleges that the NAL 401(k) Committee breached its fiduciary duty of loyalty, in that its actions were not taken solely in the interests of Plan participants and beneficiaries.

In Count II, Plaintiff alleges that the Committee breached its fiduciary duty of prudence, in that (1) it utilized an imprudent and flawed process in determining how forfeitures would be allocated, and (2) it failed to exhaust forfeitures by year's end, as instructed by the IRS.⁵ Plaintiff also asserts under Count II that the Committee breached its duty to act in accordance with Plan documents.

In Count III, Plaintiff alleges that the Committee engaged in prohibited transactions in violation of 29 U.S.C. § 1106(b).

In Count IV, Plaintiff alleges that NAL itself had a duty to monitor the Committee and breached that duty by allowing the transgressions contemplated in the first three Counts.

Defendants raise numerous arguments in their Motion to Dismiss, some broadly applicable to all four Counts, some narrowly tailored to a specific count. Those arguments are: (1) the NAL 401(k) Plan permits allocation of forfeitures to offset employer contributions; (2) such allocations are also permitted by ERISA and the Tax Code; (3) Plaintiff's contention that the Committee should have allocated forfeitures toward the payment of Plan costs is tantamount to a claim that participants in a defined benefit plan are entitled to have the costs of that plan paid on their behalf, a position contradicted by Seventh Circuit case law and ERISA itself; (4) Plaintiff's fiduciary claims must fail because he is effectively challenging the design of the NAL 401(k) plan itself, a settlor function, rather than any fiduciary decisions; (5) Plaintiff's breach of loyalty and prohibited transactions claims fail because those claims are brought solely against the 401(k) Committee, such that Plaintiff cannot plausibly allege any self-dealing; (6) Plaintiff's allegations that the Committee utilized an imprudent or flawed process are conclusory; (7) Plaintiff has failed to allege that the Committee took any action inconsistent with the Plan; (8) an IRS newsletter suggesting that forfeiture funds be exhausted does not create a cause of action; (9) Plaintiff's prohibited transactions claim fails because the Committee's allocation of forfeitures is not a “transaction” as contemplated by ERISA; and (10) Plaintiff's failure-to-monitor claim against NAL fails because it is derivative of the first three claims.

 ERISA Overview

“ERISA is a comprehensive and reticulated statute, the product of a decade of congressional study of the Nation's private employee benefit system.” Great-W. Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209 (2002) (cleaned up). The purpose of ERISA is not to confer upon employees any particular benefit, but simply to protect those benefits that are promised. As the Supreme Court has explained:

Nothing in ERISA requires employers to establish employee benefits plans. Nor does ERISA mandate what kind of benefits employers must provide if they choose to have such a plan. ERISA does, however, seek to ensure that employees will not be left empty-handed once employers have guaranteed them certain benefits․ When Congress enacted ERISA it wanted to make sure that if a worker has been promised a defined pension benefit upon retirement—and if he has fulfilled whatever conditions are required to obtain a vested benefit—he actually will receive it. Accordingly, ERISA tries to make as certain as possible that pension fund assets be adequate to meet expected benefits payments.

Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996).

ERISA imposes upon those administering a benefits plan certain fiduciary duties. Namely, 29 U.S.C. § 1104 provides:

(a) Prudent man standard of care

(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.

ERISA further provides that “a person is a fiduciary with respect to a plan to the extent [inter alia] he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets[.]” 29 U.S.C. § 1002(21)(A)(i).

 Survey of Case Law

Turning to the parties’ arguments (and counterarguments) set out above, it is clear that many, if not most, of those arguments have been raised and addressed in the recent series of cases that have arisen following Walsh v. Allen, 2022 WL 256312, at *1 (W.D. Ky. Mar. 28, 2022), a case in which the Department of Labor sued Sypris Solutions, Inc. and several of its employees for violating the terms of Sypris's retirement plans and breaching their fiduciary duties and other obligations under ERISA. See Mejdrich, Kellie, Rash Of 401(k) Forfeiture Suits Approach First Hurdles, https://www.law360.com/articles/1824324 (last accessed May 30, 2025) (observing that, as of April 2024, there were at least nine pending class actions in which the core claim was that 401(k) plan administrators breached their fiduciary duties under ERISA by declining to allocate forfeitures toward the payment of plan expenses). The court will begin with an assessment of this line of cases, with an emphasis on those decisions upon which the parties primarily rely.

Defendants rely most significantly on the decision of the Northern District of California court in Hutchins v. HP Inc., 737 F. Supp. 3d 851 (N.D. Cal. 2024) (“Hutchins I”). In that case, the court framed the issue as follows: “Plaintiff Paul Hutchins has opened with a swing for the fences—his Complaint takes the position that a failure to use forfeited contributions to pay administrative costs is always a violation of ERISA.” Id. at 856. The court ultimately rejected that theory as implausibly broad and granted the defendant's motion to dismiss. Id. at 862.

Recognizing that such a theory would effectively obligate fiduciaries to always allocate forfeitures toward plan expenses, the Hutchins I court opined that the theory was necessarily in tension with the Supreme Court's analysis in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014), in which the Court emphasized that the plausibility of allegations of breach of fiduciary duty should consider the context and circumstances of the fiduciary's actions. Hutchins I, 737 F. Supp. 3d at 862. Moreover, the Hutchins I court noted that ERISA does not itself confer any particular benefit, but simply protects those benefits that are due to an employee under their plan. Id. “Because Plaintiff's claims are so broad,” the court concluded, “he is effectively arguing that the fiduciary duties of loyalty and prudence create a benefit: the payment of his administrative costs. However, the Plan does not provide any such benefit, and Plaintiff does not allege any facts showing that he is entitled to such a benefit.” Id.; see also Dimou v. Thermo Fisher Sci., Inc., 2024 WL 4508450, at *9 (S.D. Cal. Sept. 19, 2024) (“Plaintiff's fiduciary liability claim, which mirrors the claim asserted in Hutchins, is similarly too broad to be plausible.”).

Notably, the Hutchins I court also addressed an argument made by Defendants in this case, namely, that the plaintiff was actually challenging decisions made in a settlor capacity, rather than in a fiduciary capacity. Though the instant Defendants rely strongly on Hutchins I throughout their briefs, that court actually rejected that argument out of hand, concluding:

The Court finds that the decision to allocate forfeited amounts is a fiduciary, as opposed to a settlor, function. Defendants are correct that the decision to include a Plan term stating that forfeited amounts may be used to reduce employer contributions, to restore benefits previously forfeited, or to pay Plan expenses is a settlor decision because it is a design decision. See Plan § 11(h). However, Plaintiff's challenge is not to § 11(h) of the Plan, but to Defendants’ selection of one of the options under § 11(h).

Hutchins I, 737 F. Supp. 3d at 860.

In dismissing the fiduciary claims, the Hutchins I court concluded: “Plaintiff's claim at its current breadth is implausible. But Plaintiff might be able to plausibly allege disloyalty or imprudence based on more particularized facts or special circumstances present in this case․ Accordingly, the Court will DISMISS Plaintiff's fiduciary duty claims with leave to amend to permit Plaintiff to narrow these claims.” Id. at 864. Hutchins subsequently filed an amended complaint, and the defendants again moved to dismiss. The court took up that motion in Hutchins v. HP Inc., 2025 WL 404594, at *1 (N.D. Cal. Feb. 5, 2025) (“Hutchins II”), which Defendants in this case rely upon as supplemental authority.

In Hutchins II, the court reiterated that “the breadth of Plaintiff's theory continues to make it implausible.” Id. at 5. “It is still true,” the court continued, that “under Plaintiff's theory, in every plausible instance where HP, as fiduciary, would be given the option between using forfeited funds to pay administrative costs or reduce employer contributions, the fiduciary would always be required to choose to pay administrative costs. That result would be contrary to the Plan and to ERISA.” Id. (emphasis added).

Elsewhere, the court stated that “[w]here Plaintiff goes awry is in his implicit suggestion that acting in the best interests of the plan participants and beneficiaries ․ requires ‘maximizing pecuniary benefits’ to individual plan participants or ‘resolving’ every issue of interpretation in favor of plan beneficiaries.” Id. at *4 (cleaned up) (quoting Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1100 (9th Cir. 2004)). Instead, the court opined, “an ERISA fiduciary's duty is to ensure that all participants have received the full benefit guaranteed to them by the plan documents.” Id. Because Hutchins did not allege that any plan participant had received anything less that the full employer contributions, the court reasoned, his breach of loyalty claim necessarily failed. Id.⁶

Plaintiff, meanwhile, relies largely on two cases: Rodriguez v. Intuit Inc., 744 F. Supp. 3d 935 (N.D. Cal. 2024), and Perez-Cruet v. Qualcomm Inc., 2024 WL 2702207 (S.D. Cal. May 24, 2024).

Rodriguez also involved a plan that gave the employer discretionary authority over the management of forfeitures. Rodriguez, 744 F. Supp. 3d at 940. Like this case, and the Hutchins cases, Rodriguez alleged that the defendants had breached their duty of loyalty under ERISA by using forfeitures to offset employer contributions rather than using them to pay plan expenses. Id. at 941.

The Rodriguez court also began its analysis by rejecting the defendants’ claim that the application of forfeitures was not a fiduciary function. Id. at 942-43. Turning to the substance of the breach of loyalty claim, the court rejected the defendants’ argument that because they had complied with the terms of the plan, they necessarily could not have breached their duty of loyalty. Id. at 944. Notably, Rodriguez argued that the defendants had not complied with the terms of the plan, because the plan allowed only for forfeitures to offset certain types of employer contributions, and the offsets in question did not fall into the allowable categories. Id. While the court found that allegation plausible, it made clear that an allegation of a violation of plan terms was not indispensable, concluding:

Further, even if Intuit had complied with the terms of the Plan Document, that alone would not excuse Intuit from fulfilling its fiduciary duties under ERISA. See Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014) (holding that ERISA's fiduciary duties “trump[ ] the instructions of a plan document”). The allegations in the complaint plausibly suggest that Intuit breached its duty of loyalty by making decisions that were not in the best interest of Plan participants.

Rodriguez, 744 F. Supp. 3d at 944.

The court in Perez-Cruet addressed the same issue, and its analysis was brief and straightforward. After noting that the plan in that case was “in sound financial condition,” the court observed that “all Plan participants had to pay for administrative expenses that could have been reduced to zero has the Defendants chosen to use forfeited contributions in that way.” Perez-Cruet, 2024 WL 2702207, at *2. The court pointed out that ERISA's fiduciary duty of loyalty expressly contemplates that a fiduciary will act “for the exclusive purpose of ․ defraying reasonable expenses of administering the plan.” Id. (quoting 29 U.S.C. § 1104(a)(1)(A)(ii)). Clearly, the defendants could have defrayed the costs of administering the plan but elected not to, such that the court found the plaintiff had plausibly alleged a breach of the duty of loyalty. Id.

Finally, the court turns to a pair of recent cases from another Northern District of California court, McManus v. Clorox Co., 2024 WL 4944363 (N.D. Cal. Nov. 1, 2024) (“McManus I”), and McManus v. Clorox Co., 2025 WL 732087 (N.D. Cal. Mar. 3, 2025) (“McManus II”), both of which are referenced in the parties’ briefing in this case.

McManus I is largely similar to Hutchins I. McManus alleged that his employer breached its duty of loyalty by using forfeitures to reduce its own contributions to the plan, rather than putting them toward plan expenses. McManus I, 2024 WL 4944363, at *1. The court agreed that the defendants made that decision in a fiduciary capacity, but found that the plaintiff's claim was “impermissibly broad.” Id. at *6. The court observed that certain IRS and Treasury regulations permitted the practice of allocating forfeitures toward employer contributions, and that “Plaintiffs [sic] do not persuasively explain how the Department of Treasury would now allow forfeitures to be used to reduce employer contributions if such a practice breached fiduciary duties.” Id. The court also found that the plaintiff's broad-brush approach was incompatible with the Supreme Court's indication in Dudenhoeffer that inquiries into fiduciary breaches are necessarily “context specific.” Id. (quoting Dudenhoeffer, 537 U.S. at 425).

The McManus I court granted the plaintiff leave to amend, which gave rise to the decision in McManus II. The court noted that the plaintiff had added “more specific allegations” in the amended complaint, namely: “For each year of the putative class period, Clorox had sufficient cash and equivalents on hand to satisfy its contribution obligations to the Plan. Nevertheless, throughout that period, Defendants consistently based the decision of how to allocate forfeitures solely on Clorox's own self-interests and failed to consider the interests of the Plan and its participants.” McManus II, 2025 WL 732087, at *2. The plaintiff also alleged: “At the discretion of Defendants, forfeited nonvested accounts in their fiduciary capacity, forfeitures may be used to either pay the Plan's expenses or reduce the Company's contributions to the Plan. Which of these options would be in the best interests of participants depends on the particular facts and circumstances present at the time of the allocation decision.” Id. (emphases used in original to indicate allegations included for the first time in the amended complaint). The plaintiff also advanced a new legal theory in his amended complaint: that the defendants breached their duty of loyalty because they were under a conflict of interest. Id.

The McManus II court denied the defendants’ motion to dismiss, finding that the “plaintiff's new factual allegations, while sparse,” were sufficient to plausibly state a claim that the defendants had breached their fiduciary duties. Id. at *4. Notably, the court rejected the defendants’ argument that “plaintiff's claim is insufficient because defendant's [sic] practice does not run afoul of the Plan document's language.” Id. Wrote the court: “[A] fiduciary is not allowed to violate ERISA merely because language in a plan document allows it. Defendants’ argument assumes there is no fiduciary breach, which is yet to be decided. If there is a breach, then abiding by the Plan terms cannot save defendants.” Id. (internal citation omitted).

 Scope of Plaintiff's Claims

Plaintiff has expressly alleged that forfeitures were used to reduce or offset NAL's “non-elective contributions” to the Plan. Plaintiff's theory that the election of such an offset—rather than using forfeitures to pay Plan expenses—is a fiduciary breach proceeds intuitively. QNECs are nonelective, or mandatory, under the Plan. Plan participants are entitled to them. By offsetting their nonelective obligations with forfeitures, Defendants receive a benefit while participants simply receive that which they would have received anyway, and remain on the hook for paying their share of Plan expenses.

Plaintiff, in the Amended Complaint, also makes occasional references to NAL's “matching” and discretionary contributions. It appears that Plaintiff uses the term “matching contributions” synonymously with NAL's nonelective contributions, or QNECs. Strictly speaking, however, QNECs are not matching contributions. The Plan itself states that: “Matching Contributions means Employer Contributions that are contingent on a Participant's Elective Deferral Contributions.” QNECs are based on the participant's salary, not on the amount of their elective deferrals. Indeed, the Plan states explicitly that “Matching Contributions are not permitted.”

Plaintiff's references to discretionary contributions also suggest some confusion. For instance, Plaintiff occasionally makes oxymoronic references to NAL's “discretionary contribution obligations” or “discretionary contributions owing to the Plan.” But the Plan makes clear that discretionary contributions are exactly that—discretionary. As the 2018 SPD stated, “ ‘Discretionary’ means [NAL] choose[s] the amount of the contribution and whether or not it will be made.”

This distinction becomes relevant when Plaintiff references Defendants “offsetting” their discretionary contributions through use of forfeitures. Plaintiff never actually makes a factual allegation that Defendants pursued any such offset. And perhaps this makes sense, given that an “offset” of an entirely discretionary contribution is somewhat contradictory. Consider an example: If NAL decided to make a discretionary contribution of $1 million in a given year, and “offset” that with $500,000 in forfeited funds, participants have still clearly received a benefit from the forfeitures. Without the so-called offset, the discretionary contribution would have only $500,000. To the extent there may be any difference in kind between participants’ benefit from forfeitures in this fashion, and benefit in the form of payment of Plan expenses, Plaintiff has not described it.

Accordingly, the court construes Plaintiff's claim as relating solely to the decision to use forfeitures to offset nonelective contributions in lieu of using them to defray Plan expenses.⁷ And the latter portion of that construction is key. Per the Amended Complaint, some portion of forfeitures were used to offset nonelective contributions in 2020, 2021, and 2022, but only after forfeitures were first used to fully defray Plan expenses. Defendants argue that Plaintiff thus has no claim with respect to those years, a point Plaintiff does not dispute.

 Defendants’ Initial Arguments

Defendants raise a series of interrelated initial arguments, some of which were also raised and addressed in the cases discussed above. Those arguments are: (1) the NAL 401(k) Plan permits the allocation of forfeitures to offset employer contributions; (2) the law “has always permitted” allocation of forfeitures to employer contributions; (3) Plaintiff's argument is at odds with Seventh Circuit case law; and (4) Plaintiff is actually challenging settlor decisions, i.e., the design of the NAL 410(k) Plan, rather than decisions made in a fiduciary capacity.

As will be seen, each of these arguments is, at bottom, premised upon a misunderstanding (or mischaracterization) of Plaintiff's allegations and arguments. Defendants consistently describe Plaintiff's position in these or similar terms: “According to Plaintiff, forfeitures can never be used to offset employer contributions.” (Def. Br. at 19) (emphasis in original). Defendants assert this point repeatedly.⁸

The court does not find that the Amended Complaint is susceptible to such an interpretation. Within the Amended Complaint, Plaintiff seems to go to great lengths to specifically allege that the decision to allocate forfeitures toward QNECs can align with the interests of Plan participants. He writes: “Using the forfeitures to ‘offset our next contributions’ is always in the best interest of NAL because that option would decrease NAL's own contribution costs. This option might also be in the best interests of participants where there is a risk that NAL may be financially unable to satisfy its matching or discretionary contribution obligations.” Absent such a risk, Plaintiff alleges, allocation of forfeitures toward Plan expenses is the decision in Plan participants’ best interests. And he alleges as a factual matter that “NAL was under no risk of defaulting on its contribution obligations to the Plan.”

Defendants acknowledge that aspect of Plaintiff's claim—the notion that allocation of forfeitures toward offsetting nonelective contributions can sometimes comport with the duty of loyalty—only briefly. They contend that “Plaintiff's dubious assertion that forfeitures may be allocated to contributions only if NAL is at financial risk is false. NAL could simply amend—or even terminate—the Plan. [Citations omitted.] But further, forfeitures come solely from unvested discretionary employer contributions, which the plan sponsor could terminate at any time. Without discretionary contributions, there would be no forfeitures.”

The first component of Defendants’ argument seems to actually support Plaintiff's point. In the event of potential financial hardship, allocation of forfeitures toward the employer's nonelective contributions is surely a better result for Plan participants than outright termination of the Plan. As for the second component, it is no doubt true that without discretionary contributions, there would be no forfeitures. But it is unclear how that advances any particular argument for Defendants.

Plaintiff has expressly alleged that the proper allocation of forfeitures is a context-dependent inquiry, and that allocation toward offsetting employer contributions may at least sometimes be in the best interests of participants. While the circumstances he describes may ultimately be narrow, the Amended Complaint simply cannot be construed as advancing a claim that offsetting employer contributions never aligns with the duty of loyalty.

The McManus cases are illustrative of the difference between the two interpretations of Plaintiff's claim. The McManus I court, echoing Hutchins I, found that the plaintiff's claim was “impermissibly broad,” and that the plaintiff did “not persuasively explain how the Department of Treasury would now allow forfeitures to be used to reduce employer contributions if such a practice breached fiduciary duties.” McManus I, 2024 WL 4944363, at *6. But the plaintiff amended his complaint to specifically allege that what type of forfeiture allocation “would be in the best interests of participants depends on the particular facts and circumstances present at the time of the allocation decision,” and that, in that instance, “Clorox had sufficient cash and equivalents on hand to satisfy its contribution obligations to the Plan.” McManus II, 2025 WL 732087, at *2. And the McManus II court found these more particularized allegations sufficient to withstand dismissal. Id. at *5.⁹

Here, no less than in McManus, the distinction is a critical one. Defendants insist that the allocation of forfeitures toward offsetting employer contributions is permissible, both according to the Plan itself and various Tax Code provisions and Treasury regulations (or proposed regulations). If Plaintiff was indeed arguing that allocation of forfeitures toward offsetting employer contributions was always a breach of the fiduciary duty of loyalty, Defendants might have a point: They cannot be acting improperly where their conduct is endorsed by the law and the Plan itself.

But as discussed, Plaintiff's position is more narrow. It is not the “swing for the fences” argument rejected as overbroad in Hutchins I. Recall that in that case, upon which Defendants so strongly rely, the court described the plaintiff's complaint as “tak[ing] the position that a failure to use forfeited contributions to pay administrative costs is always a violation of ERISA.” Hutchins I, 737 F. Supp. 3d at. at 856. In contrast, Plaintiff in this case only contends that the discretionary choice to apply forfeitures toward employer contributions was, in this instance, a fiduciary breach. Defendants’ contention that allocating forfeiture in this manner is permissible, in a general sense, does not demonstrate that that decision comported with the duty of loyalty in this particular case.

The same logic applies to defeat Defendants’ argument concerning Seventh Circuit case law—an argument mirroring the one accepted in Hutchins I. Defendants cite Loomis v. Exelon Corp., 658 F.3d 667, 671 (7th Cir. 2011), for the proposition that, in their words, “the Seventh Circuit has specifically held that ERISA does not require employers to pay administrative fees.”¹⁰ And they argue that Plaintiff here “demands a new benefit in conflict with Seventh Circuit law.”

But again, Plaintiff is not asserting a categorical rule that employers must pay plan expenses. Nor would his claim effectuate such a result. Far more narrowly, he is merely arguing that where, as here, the allocation of forfeitures is committed to the discretion of fiduciaries, that decision must be made in accordance with ERISA's fiduciary directives.

To that point, Defendants raise the same argument rejected in a number of the cases discussed above, that Plaintiff is actually challenging a decision made in a settlor capacity, rather than a fiduciary capacity. They argue: “Plaintiff's claim that NAL can never use forfeitures to offset employer contributions, and instead must use forfeitures to give him more than the 401(k) Plan provides, is in direct contradiction with the Plan terms. Therefore, his breach of fiduciary duty claims fail because he is challenging the Plan's design which is settlor, not fiduciary conduct.” (Emphasis in original).

It is immediately clear that this argument rests on the same flawed premise as Defendants’ other arguments—the notion that Plaintiff is arguing that NAL can “never” use forfeitures to offset its contributions or that it “must” use them to pay Plan expenses. To be sure, when Defendants designed the 401(k) Plan, and in doing so directed that “Forfeitures may be used to pay administrative expenses or to reduce Employer Contributions,” they were acting as settlors. See Lockheed Corp., 517 U.S. at 890 (“Employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans. When employers undertake those actions, they do not act as fiduciaries, but are analogous to the settlors of a trust.” (cleaned up)). But when the time came to actually exercise the discretion provided by the Plan, to determine whether forfeitures would be allocated toward Plan expenses or toward offsetting NAL's contributions, the decision was clearly made in a fiduciary capacity. See Hutchins I, 737 F. Supp. 3d at 860.

That having been said, Plaintiff does seem to assert an altogether separate theory in Paragraph 53 of the Amended Complaint, where he asserts: “Even if forfeitures covered all NAL 401(k) Plan expenses and there [were] still forfeitures remaining, then the Plan fiduciaries still had another discretionary fiduciary decision under ERISA. Under such circumstances, Plan fiduciaries should have returned the remaining forfeitures to Plan participants, as a decision to reduce company expenses would violate the duties of loyalty and prudence.” No more is said on this theory, outside of that paragraph, and Plaintiff makes no attempt to revisit it in any significant fashion in his Response.¹¹

The Plan clearly states that forfeitures may be allocated toward expenses or toward offsetting Defendants’ contributions. To the extent that Plaintiff is putting forth a claim that, in fact, Defendants may never use forfeitures to offset their contributions, it would seem that he is challenging a settlor function, i.e., the design of a plan that allows employer offsets. Or, he is asserting a fiduciary claim as implausibly overbroad as that rejected in Hutchins I and II and similar cases. In either case, again noting that Plaintiff makes no defense of this theory in his Response, Defendants’ Motion to Dismiss is granted with respect to any claim arising out of the theory advanced in Paragraph 53 of Plaintiff's Amended Complaint.

 Count I – Breach of the Fiduciary Duty of Loyalty

In order to state a claim for breach of fiduciary duty under ERISA, a plaintiff must allege: “(1) that the defendant is a plan fiduciary; (2) that the defendant breached its fiduciary duty; and (3) that the breach resulted in harm to the plaintiff.” Allen v. GreatBanc Tr. Co., 835 F.3d 670, 678 (7th Cir. 2016). The court has determined that Plaintiff has plausibly alleged that the Administrative Committee was acting in a fiduciary capacity when it made the discretionary decision as to how forfeitures would be allocated in any particular year. And there appears to be no dispute that, at least under Plaintiff's theory, the breach resulted in harm to Plaintiff, insofar as he was required to pay Plan expenses in certain years.

This leaves the question of whether Plaintiff has plausibly alleged a breach. Like the courts in Rodriguez, Perez-Cruet, and McManus II, this court finds that Plaintiff has done so.

ERISA requires that fiduciary duties be carried out “solely in the interest of the participants and beneficiaries” and “for the exclusive purpose of” inter alia, “defraying reasonable expenses of administering the plan.” 29 U.S.C. § 1104(a)(1)(A) (emphases added). Plaintiff has plainly alleged that the Administrative Committee was not acting “solely in the interest of the participants and beneficiaries” when it elected to use forfeitures to offset nonelective employer contributions, thus providing a benefit to NAL while ensuring that Plan participants would be responsible for administrative costs. “Deliberately favoring the corporate treasury when administering (as opposed to framing the terms of) a plan is inconsistent with the statute.” Frahm v. Equitable Life Assur. Soc. of U.S., 137 F.3d 955, 959 (7th Cir. 1998). While Plaintiff allows for the possibility that an offset of employer contributions may sometimes also be to the ultimate benefit of participants and beneficiaries, he alleges that that was not the case here, as there was no risk here that NAL would not be able to meet its obligations.

While Defendants make a great deal of arguments in their briefs, they never actually contest this point. That is, there is no argument that the Administrative Committee was acting in the interests of participants and beneficiaries, or that its decisions comported with the text of § 1104(a)(1)(A).

Defendants do raise another, more technical argument. They maintain that, in the Seventh Circuit, “plaintiffs state a claim for breach of the duty of loyalty only if they plausibly allege self-dealing, and Plaintiff fails to allege any self-dealing.” Indeed, the Seventh Circuit has often suggested that self-dealing, in some form, is part and parcel of a breach of the duty of loyalty. E.g., Albert v. Oshkosh Corp., 47 F.4th 570, 583 (7th Cir. 2022) (affirming dismissal of breach of loyalty claim where “there are no allegations that Oshkosh engaged in self-dealing at the expense of the Plan”); see also Forman v. TriHealth, Inc., 40 F.4th 443, 450 (6th Cir. 2022) (cited in Albert for the proposition that a duty of loyalty claim fails where no allegations suggest “the fiduciary's operative motive was to further its own interests”).

That Defendants’ premise is correct, however, does not ameliorate its tortured conclusion. They argue that the Administrative Committee's decision to allocate forfeitures toward offsetting NAL's contributions to the Plan benefited NAL, but did not benefit the Administrative Committee itself. Unsurprisingly, Defendants fail to cite any case law that would allow the court to draw such a line in the sand between an employer and the committee to which it has delegated administrative authority. To allow the Administrative Committee to take whatever actions it pleases to benefit the company, so long as the Committee itself does not benefit, would effectively eliminate the duty of loyalty from ERISA.

Accordingly, Defendants’ Motion to dismiss is DENIED as to Count I of the Amended Complaint.

 Count II – Breach of the Fiduciary Duty of Prudence

The Amended Complaint alleges that the Administrative Committee breached its fiduciary duty of prudence in two discrete ways: (1) It utilized an imprudent and flawed process in determining how forfeitures would be allocated; and (2) it failed to exhaust forfeitures by year's end, as instructed by the IRS. With respect to both claims, Defendants argue that Plaintiff has failed to plausibly allege a breach.

ERISA mandates that fiduciaries discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]” 29 U.S.C. § 1104(a)(1)(B). “Because the content of the duty of prudence turns on the circumstances prevailing at the time the fiduciary acts, the appropriate inquiry will necessarily be context specific.” Dudenhoeffer, 573 U.S. at 425. “At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” Hughes v. Nw. Univ., 595 U.S. 170, 177 (2022).

 Process

Plaintiff alleges that the Administrative Committee, in deciding how to allocate forfeitures, “utilized an imprudent and flawed process.” He alleges that, despite the obvious conflict of interest presented by this decision, the Administrative Committee “failed to undertake any investigation into which option was in the best interest of the Plan's participants and beneficiaries.” By way of example, Plaintiff alleges that the Administrative Committee did not “investigate whether there was a risk that NAL would default on its matching or discretionary contribution obligations if forfeitures were used to pay Plan expenses, or evaluate whether there were sufficient forfeitures to eliminate the Plan expenses charged to participants and still offset a portion of NAL's own contribution obligations, as a prudent person would have done.” He similarly alleges that Defendants “failed to consult with an independent non-conflicted decisionmaker to advise them in deciding upon the best course of action for allocating the forfeitures in the Plan, as a prudent person would have done.” Ultimately, Plaintiff accuses Defendants of “reflexively cho[osing] to use the forfeitures for their own interest, to the detriment of the Plan and its participants.”

Defendants raise a number of counterarguments: (1) The above allegations are “conclusory” and “speculative”; (2) Plaintiff's claims are belied by the fact that forfeitures were allocated toward Plan expenses between 2020 and 2022; (3) “[u]nder Seventh Circuit precedent, there is no breach where a fiduciary acts in compliance with the lawful terms of the plan document”; and (4) Plaintiff's theory of imprudence is reliant “on the faulty assumption that allocation of forfeitures to employer contributions is per se imprudent such that any process reaching that result is imprudent.”

The court rejects Defendants’ contention that Plaintiff's claims are conclusory or lacking in “specific facts.” He has alleged that the Administrative Committee failed to investigate whether NAL was at risk of defaulting on its obligations or whether some forfeited funds would be left over to cover portions of NAL's obligations even after covering Plan expenses. He alleges that the Administrative Committee did not consult with a non-conflicted decisionmaker before making its allocation determination. These are factual allegations that the court takes as true at this stage of the proceedings. Defendants’ claim that Plaintiff “pleads zero facts about the decision-making processes of the 401(k) Committee in his Complaint” (emphasis in original) is wrong. Moreover, “an ERISA plaintiff alleging breach of fiduciary duty does not need to plead details to which she has no access, as long as the facts alleged tell a plausible story.” Allen v. GreatBanc Tr. Co., 835 F.3d 670, 678 (7th Cir. 2016).

The court also fails to see how Plaintiff's claims are “belied” by the fact that forfeitures were allocated toward Plan expenses in certain years. That the Administrative Committee reached Plaintiff's preferred result in certain years does not undermine the allegation that the Committee, in any year, used a flawed process in making its decisions.

Defendants next contend that “[u]nder Seventh Circuit precedent, there is no breach where a fiduciary acts in compliance with the lawful terms of the plan document.” In support, Defendants rely on Newell Operating Co. v. Int'l Union of United Auto., Aerospace, & Agricultural Implement Workers of America., 532 F.3d 583, 589 (7th Cir. 2008), in which the Seventh Circuit stated: “[W]e do not understand how the Committee will violate its fiduciary duties under ERISA by following the terms of the Plan when it has an obligation to do so under ERISA.”

But Newell was decidedly straightforward. In the case, the plan sponsor amended the plan to provide that retirees would be charged premiums, and the committee simply enforced that amendment by collecting premiums. Id. Thus, the court surmised that the committee, in that particular case, could not have breached fiduciary duties simply by doing what the plan commanded it to do.

It is a misreading of Newell to suggest that it stands for the broad proposition that any fiduciary who does not violate the terms of a plan necessarily has not breached a fiduciary duty. Indeed, such a position is contradicted by ERISA itself and has been rejected by the Supreme Court. ERISA provides that a fiduciary must discharge his duties “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter[.]” 29 U.S.C. § 1104(a)(1)(C). As the Dudenhoffer Court observed: “This provision makes clear that the duty of prudence trumps the instructions of a plan document.” Dudenhoeffer, 573 U.S. at 421; see also Rodriguez, 744 F. Supp. 3d at 944 (“[E]ven if Intuit had complied with the terms of the Plan Document, that alone would not excuse Intuit from fulfilling its fiduciary duties under ERISA.”). Thus, while the Administrative Committee unquestionably complied with the Plan in that it selected one of the two options for allocations of forfeitures, it was no less obligated to apply a prudent man standard of care in making that choice.

Finally, Defendants argue that Plaintiff's theory of imprudence is reliant on the “faulty assumption that allocation of forfeitures to employer contributions is per se imprudent such that any process reaching that result is imprudent.” This argument is simply a rehash of Defendants’ misunderstanding or mischaracterization of Plaintiff's breach of loyalty claim. Here, Defendants argue: “Plaintiff's allegations about a duty to investigate are incompatible with his theory because no investigation would be necessary if, as he asserts, ERISA's fiduciary duties bar any choice to allocate forfeitures to employer contributions before Plan expenses or reallocation to participant accounts.” But, again, Plaintiff maintains that allocation of forfeitures toward employer contributions may sometimes be the proper, or at least a defensible decision. His claim that the duty of prudence requires that the Committee's decision be based on an adequate investigation is well in line with that theory.

Defendants’ Motion to Dismiss is therefore denied with respect to the claim that they violated their duty of prudence by employing an imprudent decisionmaking process.

 Forfeiture Exhaustion

Plaintiff alleges in his Amended Complaint that “Multiple Financial Statements show a year-end balance in the forfeiture balance[,] which is a violation of IRS/Treasury rules.” In support, Plaintiff relies on IRS Publication 4278-B (2010), https://www.irs.gov/pub/irs-pdf/p4278.pdf (last accessed May 30, 2025), which states:

Forfeitures must be used or allocated in the plan year incurred. The Code does not authorize forfeiture suspense accounts to hold unallocated monies beyond the plan year in which they arise. Revenue Ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participants’ accounts in accordance with a definite formula defined in the plan. This would preclude a plan from carrying over plan forfeitures to subsequent plan years, as doing so would defy the rule requiring all monies in a defined contribution plan to be allocated annually to plan participants ․ The plan document's terms should have provisions detailing how and when a plan will exhaust plan forfeitures. A plan's failure to use forfeitures in a timely manner denies plan participants additional benefits or reduced plan expenses.

Defendants argue that Plaintiff's claim based on IRS rules must be dismissed because “Plaintiff fails to explain how ERISA provides him with any cause of action to pursue alleged violations of the Internal Revenue Code, Revenue Rulings, or regulations.”

But Plaintiff is not bringing a claim for violation of the Internal Revenue Code or related provisions. He is not relying on the IRS publication above for its force of law, but rather for its underlying point: The failure to use forfeitures in a timely manner denies plan participants additional benefits or reduced plan expenses. Plaintiff's claim is brought squarely under 29 U.S.C. § 1104(a)(1)(B) on the theory that the failure to exhaust forfeitures annually is an imprudent decision.

Defendants relegate two other arguments to separate footnotes. First, they cite to IRS regulations proposed in February 2023, which include a safe harbor provision under which “forfeitures incurred during any plan year that begins before January 1, 2024, are treated as having been incurred in the first plan year that begins on or after January 1, 2024.” Use of Forfeitures in Qualified Retirement Plans, 88 Fed.Reg. 12282-01. Defendants argue that “Plaintiff certainly cannot enforce a regulation before the IRS intended to do so itself.” But again, Plaintiff is not trying to enforce any IRS regulation. He simply asserts that the rolling over of forfeitures from year to year is imprudent.

Second, on the last page of their Reply, Defendants appear to attack Plaintiff's premise, asserting: “Furthermore, Plaintiff mischaracterizes the Form 5500s to try and make this point—but the 5500s do not show that forfeitures (1) remained in the forfeiture account after allocation; or (2) were used to reduce QNECs.” Neither of these observations have any bearing on Plaintiff's claim, however. Plaintiff does not allege that forfeitures “remained in the forfeiture account after allocation,” nor is it clear what that even means. Rather, he asserts that forfeitures were allocated too late. As for the use of forfeitures to reduce QNECs, such allocation is not a component of this particular claim (and besides, Plaintiff has plainly alleged that forfeitures were used to offset QNECs).

Defendants’ later footnote does at least allude to an altogether separate point. Plaintiff alleges that “Multiple Financial Statements show a year-end balance in the forfeiture balance.” The Amended Complaint suggests that this allegation is based upon the footnotes to the audited financials; however, those footnotes simply state, using the 2019 document as an example, that “[a]t December 31, 2019 and 2018, forfeited non-vested accounts totaled $693,728 and $596,506, respectively.” The footnotes do not speak directly to the use or non-use of forfeitures. Nevertheless, Defendants have not raised this argument, and in any case, the court must accept the allegations of year-end forfeiture balances as true.

Accordingly, Defendants’ Motion to Dismiss is denied with respect to the claim that Defendants violated their duty of prudence by failing to exhaust forfeitures.

 Count II – Breach of the Duty to Act in Accordance with Plan Documents

ERISA requires that a fiduciary discharge his or her duties “in accordance with the documents and instruments governing the plan insofar that such documents and instruments are consistent with the provisions” of ERISA. 29 U.S.C. § 1104(a)(1)(D). Plaintiff alleges that Defendants’ allocation of forfeitures was in conflict with Plan documents.

Plaintiff's argument for how exactly that was the case is unclear. In the Amended Complaint, he quotes from the 2023 SPD, which states that “Each time our discretionary contributions are divided among employees, those forfeitures which have not been used to pay plan expenses or offset our next contribution are added to our discretionary contributions and divided in the same manner as discretionary contributions.” He then alleges that “If NAL decided to make a discretionary contribution, forfeitures should have been added to discretionary contributions (not offset as they were in practice).” (Emphases in original).

This puzzling allegation does not plausibly state a claim that Defendants failed to abide by any documents governing the Plan. First, Plaintiff has never alleged that Defendants used forfeitures to “offset” its discretionary contributions.¹² Second, nothing in the quoted passage from the 2023 SPD, or any other document, states that discretionary contributions cannot be “offset” by allocated forfeitures.

Plaintiff attempts to clarify his claim in his Response, though in doing so he seems to put forth an entirely new claim. He asserts that he “has plausibly alleged that NAL did not comply with the terms of the Plan document by not following the language in the Plan SPD concerning the language in the audited Financials that, ‘Forfeitures shall be used to offset future employer contributions.’ ” (Emphasis added by Plaintiff). Yet, he concedes in the very same paragraph that “Defendant[s] have indeed used plan forfeitures to offset their future employer contributions[.]”

The court surmises that Plaintiff's issue lies in the inherent contradiction found in the footnote to the 2023 IRS Form 5500, which states first that “Forfeited accounts may be used to reduce future employer contributions or pay administrative expenses of the Plan,” suggesting a discretionary choice, in accordance with the Plan, but then states immediately after that “Forfeitures shall be used to offset future employer contributions,” suggesting no discretion at all. Defendants, in their Reply, also surmise that Plaintiff bases his claim on the latter line from the 2023 Form 5500, presumably in support of the argument that Defendants reflexively used forfeitures to offset employer contributions, rather than exercising any discretion.

But that claim fails for a number of reasons. First, to the extent there is any conflict between the Plan itself and the Form 5500, it is black letter ERISA law that the Plan document itself controls. See CIGNA Corp. v. Amara, 563 U.S. 421, 438 (2011). To wit, the Form 5500 is a report to the IRS, not one of “the documents and instruments governing the [P]lan.” 29 U.S.C. § 1104(a)(1)(D). Moreover, Plaintiff's own allegations show that forfeitures were used in some years to offset costs, demonstrating that Defendants would have been very much aware of their own discretionary choice under the Plan. Finally, if most technically, the 2023 Form 5500—the only one containing the disputed mandatory language—is not relevant to Plaintiff's claims, which relate only to the years 2018 and 2019, as discussed above.

Accordingly, Defendants’ Motion to Dismiss is granted with respect to the claim that Defendants failed to act in accordance with Plan documents.

 Count III – Prohibited Transactions

ERISA proscribes certain prohibited transactions in 29 U.S.C. § 1106. Specifically prohibited are certain transactions between the plan and a party in interest (subsection (a)), between the plan and a fiduciary (subsection (b)), and involving a transfer of real or personal property to the plan by a party in interest (subsection (c)).

Plaintiff specifically invokes subsection (b)(1), which prohibits a plan fiduciary from “deal[ing] with the assets of the plan in his own interest or for his own account[.]” 29 U.S.C. § 1106(b)(1). Plaintiff argues that by allocating forfeitures toward offsetting employer contributions, “thereby saving NAL millions of dollars in contribution expenses, Defendant Administrative Committee of the NAL 401(k) Plan dealt with the assets of the Plan in their own interest and for their own account.”

Defendants argue that forfeitures never actually leave the plan, and that the allocation of forfeitures is not a “transaction,” let alone a prohibited one.¹³

In making that argument, Defendants rely primarily on the Supreme Court decision in Lockheed. In that case, the Court held that Lockheed's conditioning the receipt retirement benefits on plan participants’ waiver of employment claims did not constitute a “transaction” for the purposes of the plaintiff's § 1106(a) claim. Lockheed, 517 U.S. at 892-93. Considering the specific transactions proscribed in that subsection, the Court surmised that:

Section 406(a)(1)(D)[14] does not in direct terms include the payment of benefits by a plan administrator. And the surrounding provisions suggest that the payment of benefits is in fact not a “transaction” in the sense that Congress used that term in § 406(a). Section 406(a) prohibits fiduciaries from engaging the plan in the “sale,” “exchange,” or “leasing” of property, 29 U.S.C. § 1106(a)(1)(A); the “lending of money” or “extension of credit,” § 1106(a)(1)(B); the “furnishing of goods, services, or facilities,” § 1106(a)(1)(C); and the “acquisition ․ of any employer security or employer real property,” § 1106(a)(1)(E), with a party in interest. See also § 1108(b) (listing similar types of “transactions”). These are commercial bargains that present a special risk of plan underfunding because they are struck with plan insiders, presumably not at arm's length.

Id.

Defendants suggest that the above passage is controlling. But the court finds that it is of little value in the instant context. In considering whether certain conduct constituted a transaction under § 1106(a), the Lockheed Court, naturally, considered all of the specific examples listed by Congress under that subsection, and found that the conduct in question was not sufficiently analogous. But § 1106(b) does not contain such a list, and there is no reason to believe that the analysis concerning a different part of the statute must apply with equal force. To that point, Defendants argue that there is no transaction here because the allocation of forfeitures “did not involve any ‘quid pro quo,’ ‘commercial bargains’ or any other transaction between the Plan and another party.” Yet whether subsection (b) should be limited to commercial transactions is a distinct question from that addressed in Lockheed.

Absent any binding authority, the parties resort to reliance on a now familiar set of cases. Defendants rely on Hutchins I, in which the court dismissed an identical claim, rejecting the notion that an employer's use of forfeited amounts as a substitute for its future plan contributions is a transaction. 737 F. Supp. 3d at 868. Relying in part on Lockheed and in part on other cases, the Hutchins I court ultimately concluded that reallocation of assets within a plan could not constitute the required transactions, whether under subsection (a) or (b). Id. (“Plaintiff's allegations show that forfeited amounts remain Plan assets and are merely reallocated to provide pension benefits to other employees through use as matching contributions. But this is not a prohibited transaction.”); Chao v. Hagemeyer N. Am., Inc., 2006 WL 8443663, at *6 (D.S.C. Oct. 20, 2006) (holding that “exchanges or ‘reallocations’ between accounts of plan participants” that constituted “a redistribution within the plan of the plan assets” was not a prohibited transaction).

In turn, Plaintiff relies on Rodriguez and Perez-Cruet, in which the courts reached the opposite result on the same question. The Rodriguez court, in a brief analysis, rejected the Lockheed-based argument akin to that made by Defendants here and concluded that “Intuit's reallocation of undisputed plan assets to reduce its own matching contribution ․ was a ‘use’ of plan asserts [sic] for the purposes of § 1106(a)(1) (as well as a ‘dealing with’ plan assets for the purposes of § 1106(b)(1)).” Rodriguez, 744 F. Supp. 3d at 949. The Perez-Cruet court, meanwhile, found the question to be difficult, observing that there seemed to be no cases directly on point. Perez-Cruet, 2024 WL 2702207, at *5. Ultimately, however, it found: “As a fiduciary, Defendant Qualcomm plausibly did deal with the assets of the plan by doing with nonvested contribution money something other than leaving it untouched. And by dealing with the nonvested contribution money in such a way that that it benefitted Qualcomm's own interest or for its own account, Plaintiff plausibly alleges a completed prohibited deal under § 1106(b).” Id. at *6.

This court agrees with the Perez-Cruet court on at least one point: This is a close call. Upon returning to the principles underlying § 1106(b), however, the court concludes that Plaintiff has failed to describe a prohibited transaction.

“The prohibited transaction rules focus primarily on the relationship between the benefit plan and other parties to a transaction, and the section prohibits transactions where those dealing with the plan may have conflicting interests which could lead to self-dealing.” Leigh v. Engle, 727 F.2d 113, 123 (7th Cir. 1984). This aligns with the title of subsection (b): “Transactions between plan and fiduciary[.]” 29 U.S.C. § 1106(b). Thus, as most commonly understood, transactions tend to involve multiple parties and some sort of exchange between them. See Transaction, Merriam Webster Dictionary, https://www.merriam-webster.com/dictionary/transaction (last accessed May 30, 2025) (defining “transaction” in part as “especially: an exchange or transfer of goods, services, or funds”). To be sure, the conduct in question could potentially be viewed as a transaction between the Administrative Committee and NAL itself, insofar as NAL benefitted from the Committee's decision. But at the very least, as observed in Hutchins I, the movement of funds within the Plan does not fit neatly within the plain meaning of “transaction.” And to the extent that there is any difference between “dealing with” plan assets—as explicitly prohibited by § 1106(b)(1)—and “transacting” with them, the definition of the former may be even further removed from the conduct in question. See Deal, Black's Law Dictionary (12th ed. 2024) (defining “deal” as “An act of buying and selling; the purchase and exchange of something for profit”).

Furthermore, the fiduciary duties contemplated under 29 U.S.C. § 1104 “are supplemented by § 1106’s prohibition on transactions involving parties-in-interest and the fiduciaries themselves.” Dean v. Nat'l Prod. Workers Union Severance Tr. Plan, 46 F.4th 535, 547 (7th Cir. 2022) (emphasis added); Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241-42 (2000) (“Responding to deficiencies in prior law regulating transactions by plan fiduciaries, Congress enacted ERISA § 406(a)(1), which supplements the fiduciary's general duty of loyalty to the plan's beneficiaries, § 404(a), by categorically barring certain transactions deemed ‘likely to injure the pension plan.’ ” (quoting Commissioner v. Keystone Consol. Industries, Inc., 508 U.S. 152, 160 (1993))). A broader view of “transactions,” under which any moving of funds within a plan qualifies, would no longer “supplement,” but fully subsume the fiduciary duties.

Finally, there is an inherent contradiction in Plaintiff's positions. Recall that central to Plaintiff's breach of loyalty claim was that that duty did not mandate that forfeitures be allocated toward administrative costs in all scenarios. By conceding that, in certain circumstances, allocation of forfeitures to offset employer contributions may be in line with the duty of loyalty, Plaintiff escapes the contention that he is using the fiduciary duties to confer a benefit—as discussed at length above. Yet that nuance is lost when the allocation of forfeitures to offset employer contributions is characterized as a “prohibited transaction.” The Plan provides a discretionary choice: allocate forfeitures toward expenses or use them to offset employer contributions. To construe the latter option as a “prohibited transaction” would be to read that choice out of the Plan entirely and conclude that § 1106(b) confers a benefit, a result which cannot be tolerated, for the reasons explained in Hutchins I and II and the similar cases.

Accordingly, Defendants’ Motion to Dismiss is granted with respect to Plaintiff's prohibited transactions claim.

 Count IV – Failure to Monitor

Defendants correctly note that Plaintiff's failure to monitor claim, brought against NAL and the Board, is derivative of Plaintiff's first three claims. See Albert, 47 F.4th at 583 (“[The Plaintiff's] duty to monitor claims rise or fall with his duty of prudence and duty of loyalty claims.”). The only basis Defendants raise for dismissal of Count IV is that the other counts should be dismissed. Because the court has denied dismissal with respect to most of Plaintiff's preceding claims, it must necessarily deny Defendants’ Motion to Dismiss with respect to Plaintiff's failure to monitor claim.

Having addressed all of Defendants’ arguing concerning Plaintiff's forfeiture claims, the court now turns to Plaintiff's second set of claims.

Tobacco Surcharge Under the NAL Health Plan

The background facts that follow are taken from the allegations in Plaintiff's Amended Complaint. While the allegations reference a variety of documents relating to the NAL Health Plan, Plaintiff provides none of the actual documents. Defendants, for their part, have provided the NAL 2023 Benefits Guide, which the court will take into account where helpful. The court will once again accept as true all material allegations in the Complaint, drawing all reasonable inferences therefrom in Plaintiff's favor. See Lewert, 819 F.3d at 966.

 Factual Allegations

NAL offers its employees health insurance through the NAL Health Plan. Beginning in 2019, enrollees in the NAL Health Plan are required, during open enrollment, to attest whether they or their spouse are a tobacco user. A person is considered a tobacco user under the Plan if they have used tobacco products “in the last six months.” If the employee-enrollee or their spouse identify as a tobacco user, they are obligated to pay a tobacco surcharge of $780 on top of their annual medical premiums. For employees receiving weekly paychecks, $15 per paycheck would be deducted to cover the surcharge; for employees receiving semi-monthly paychecks, the amount per paycheck would be $32.50.

The Plan also provides a way for tobacco users to avoid that surcharge by completing six sessions of “the Well on Target Tobacco Cessation Program offered through Blue Cross Blue Shield of Illinois.” Those sessions consist of one-on-one coaching via telephone. Where the tobacco user completes those sessions by October 31 or November 14,¹⁵ the tobacco surcharge will be removed the following year, even if the individual continues to identify as a tobacco user. Per Plaintiff: “If employees and their spouses ‘continue to be a tobacco user[, they] must complete the [tobacco cessation] program annually to have the surcharge waived the following year.’ ”¹⁶ According to Plaintiff, a 2023 flyer sent to NAL employees describes the tobacco cessation program as follows:

If you and/or your spouse identify as smokers, you have the opportunity to remove the tobacco surcharge. You can complete the Well on Target Tobacco Cessation Program offered through Blue Cross Blue Shield of Illinois. The program is designed to help you quit smoking through one-on-one coaching. NAL requires each participant to have a minimum of six telephonic coaching calls completed by November 14, 2023[,] to have the tobacco surcharge waived for 2024.

For new hires who use tobacco, the surcharge begins six months from their start date and is waived if the tobacco user completes the tobacco cessation program prior to the surcharge starting.

Plaintiff alleges that “smoking employees and their spouses were not notified of being eligible for a ‘full award’ of being rebated all tobacco surcharges in any documents provided to them with regard to the tobacco cessation program.” For instance, he alleges that in 2019, NAL corporate resources general manager Chad Thompson sent a benefits enrollment letter that referenced the tobacco surcharge but made no mention of the tobacco cessation program or “the ability to be rebated the surcharge.”

Plaintiff alleges that he “filled out his benefit enrollment forms from 2020-2022, indicating that with regard to the tobacco user surcharge that he used tobacco products and did not wish to quit.” He further alleges that because he was not informed “that he would be eligible for a full rebate of all tobacco surcharges he already paid if he completed the tobacco cessation program,” he did not enroll in that program and thus paid tobacco surcharges in each of those years. Plaintiff further alleges that “in 2023, [he] filled out his benefit enrollment form to indicate that with regard to the tobacco user surcharge that he no longer used tobacco products.”

Given that Plaintiff's employment at NAL ended in September 2023, the court assumes that he has misstated the years. In other words, rather than filling out his benefits enrollment form “in” 2023, he filled out a benefit enrollment form for 2023, and did so during the open enrollment period at the end of 2022.

 Analysis

Plaintiff takes exception to the fact that Defendants’ Health Plan only allows enrollees to waive the tobacco surcharge prospectively. In other words, completion of the cessation program in 2023 could eliminate the surcharge in 2024, but would not result in a refund of the surcharge paid in 2023 (if one had been paid in that year). Plaintiff contends that the prospective-only structure violates ERISA because it fails to provide the “full reward” to those who complete the cessation program. See 29 C.F.R. § 2590.702(f)(3)(iv).

Before delving deeper into the details of Plaintiff's theory—and Defendants’ arguments and Plaintiff's counterarguments—it would be best to first examine the controlling legal principles.

 Applicable Law

In 1996, the Health Insurance Portability and Accountability Act added Section 702 to ERISA. Now codified at 29 U.S.C. § 1182 and entitled “Prohibiting discrimination against individual participants and beneficiaries based on health status,” that section provides that a group health plan cannot require any individual to pay a health plan premium greater than that of a similarly situated individual enrolled in the plan based on, inter alia, any medical condition or health status-related factor. 29 U.S.C. § 1182(a). Subsection (b)(2)(B), however, creates an exception to that rule. It establishes that nothing in the prohibition set out in subsection (a) shall be construed as preventing a group health plan “from establishing premium discounts or rebates or modifying otherwise applicable copayments or deductibles in return for adherence to programs of health promotion and disease prevention,” also known as wellness programs. 29 U.S.C. § 1182(b)(2)(B).

On March 23, 2010, the Patient Protection and Affordable Care Act (“ACA”) amended ERISA to incorporate Section 2705 of the Public Health Safety Act (“PHSA”) regarding, among other things, wellness programs. See 29 U.S.C. § 1185d(a)(1) (“The provisions of part A of title XXVII of the Public Health Service Act (as amended by the [ACA]) shall apply to group health plans.”). That section of the PHSA provides that “[i]f any of the conditions for obtaining a premium discount, rebate, or reward under a wellness program ․ is based on an individual satisfying a standard that is related to a health status factor, the wellness program shall not violate this section if the following requirements are complied with[.]” 42 U.S.C. § 300gg-4(j)(3). As relevant to this case, those requirements include that: (1) “the full reward under the wellness program shall be made available to all similarly situated individuals,” and (2) the plan must “disclose in all plan materials describing the terms of the wellness program the availability of a reasonable alternative standard.” 42 U.S.C. § 300gg-4(j)(3)(D), (E).

With respect to the first of those requirements, the statute establishes that:

(i) The reward is not available to all similarly situated individuals for a period unless the wellness program allows—

(I) for a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining the reward for any individual for whom, for that period, it is unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard[.]

42 U.S.C. § 300gg-4(j)(3)(D)(i). Final revised regulations promulgated by the Department of Labor (“DOL”) in 2013 provide as an example a tobacco use surcharge with a tobacco cessation program as a reasonable alternative standard. 29 C.F.R. § 2590.702(f)(4)(vi) (example 6).

With regard to notice requirements, the PHSA provides: “The plan or issuer involved shall disclose in all plan materials describing the terms of the wellness program the availability of a reasonable alternative standard ․ required under subparagraph (D). If plan materials disclose that such a program is available, without describing its terms, the disclosure under this subparagraph shall not be required.” 42 U.S.C. § 300gg-4(j)(3)(E).

The 2013 regulations contain the same requirements as the PHSA. Namely, they require that “[t]he full reward under the outcome-based wellness program[¹⁷ ] must be available to all similarly situated individuals.” 29 C.F.R. § 2590.702(f)(4)(iv). And, concerning notice, they require that:

The plan or issuer must disclose in all plan materials describing the terms of an outcome-based wellness program ․ the availability of a reasonable alternative standard to qualify for the reward ․ including contact information for obtaining a reasonable alternative standard and a statement that recommendations of an individual's personal physician will be accommodated. If plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required.

29 C.F.R. § 2590.702(f)(4)(v). Finally, the revised regulations also make clear that the concept of a “reward” includes include both “obtaining a reward ․ and avoiding a penalty (such as the absence of a premium surcharge or other financial or nonfinancial disincentive)[.]” 29 C.F.R. § 2590.702(f)(1)(i).

With regard to tobacco cessation specifically, the preamble to the 2013 regulations states: “For plans with an initial outcome-based standard that an individual not use tobacco, a reasonable alternative standard in Year 1 may be to try an educational seminar. As clarified in an example in the final regulations, an individual who attends the seminar is then entitled to the reward, regardless of whether the individual quits smoking.” 78 Fed. Reg. 33158-01, at 33164. The preamble also contains the following relevant passage:

[I]n order to satisfy the requirement to provide a reasonable alternative standard, the same, full reward must be available under a health-contingent wellness program (whether an activity-only or outcome-based wellness program) to individuals who qualify by satisfying a reasonable alternative standard as is provided to individuals who qualify by satisfying the program's otherwise applicable standard. Accordingly, while an individual may take some time to request, establish, and satisfy a reasonable alternative standard, the same, full reward must be provided to that individual as is provided to individuals who meet the initial standard for that plan year. (For example, if a calendar year plan offers a health-contingent wellness program with a premium discount and an individual who qualifies for a reasonable alternative standard satisfies that alternative on April 1, the plan or issuer must provide the premium discounts for January, February, and March to that individual.) Plans and issuers have flexibility to determine how to provide the portion of the reward corresponding to the period before an alternative was satisfied (e.g., payment for the retroactive period or pro rata over the remainder of the year) as long as the method is reasonable and the individual receives the full amount of the reward. In some circumstances, an individual may not satisfy the reasonable alternative standard until the end of the year. In such circumstances, the plan or issuer may provide a retroactive payment of the reward for that year within a reasonable time after the end of the year, but may not provide pro rata payments over the following year (a year after the year to which the reward corresponds).

78 Fed.Reg. 33158-01, at 33163.

 The Parties’ Arguments

Plaintiff asserts in his Amended Complaint that “[i]f NAL employees or their spouses enrolled in a smoking cessation program, they should have been eligible to have the tobacco surcharged removed entirely retrospectively for that plan year upon completion of the tobacco cessation program.” He thus contends in Count V that the Plan's tobacco surcharge scheme fails to qualify as a compliant wellness program because it fails to make the “full reward” available via a reasonable alternative standard.¹⁸ He also asserts, in Count VI of the Amended Complaint, that the scheme fails to qualify because insufficient notice was provided of the availability of a reasonable alternative standard.

In their Motion to Dismiss, Defendants contend that the only language Plaintiff can point to that would seem to support his position is the example quoted above from the preamble to the 2013 revised regulations. But, they argue, a preamble is not codified in the Code of Federal Regulations and does not enjoy the force of law. Moreover, to the extent such a preamble has any persuasive value in the court's interpretation of a statute, that value has been diminished following the Supreme Court's decision in Loper Bright Enterprises v. Raimondo, 603 US. 369 (2024).¹⁹ With that in mind, Defendants contend that requirement for eligibility for a “full reward” cannot be construed as mandating a retroactive refund.

Plaintiff's Response proceeds largely by way of reference to a brief filed by the DOL in a case proceeding in the Southern District of Ohio. See Sec. of Labor v. Macy's, Inc., No. 17-CV-541, Dkt. 77 (S.D. Ohio Sep. 11, 2024). Quoting recurrently from that brief, Plaintiff asserts that “because Loper Bright, and the deference doctrine it overturned, is relevant only to questions of statutory interpretation, not regulatory interpretation, it is irrelevant here.” He further argues that federal regulations still have the force of law, and that Loper Bright did not change that. Because, Plaintiff contends, this case presents an issue of regulatory interpretation, this court must apply Auer 20 deference, a framework under which courts defer to an agency's interpretation of its own regulations, and which survives Loper Bright.

 Count V – Availability of the “Full Reward”

 Relevant Case Law

While there is generally a dearth of cases dealing with the issue raised here by Plaintiff, there are three cases in which courts addressed a nearly identical question, and which therefore merit extended discussion here.

First, in Lipari-Williams v. Missouri Gaming Co., LLC, 339 F.R.D. 515, 520-21 (W.D. Mo. 2021), the plaintiffs alleged that the defendant's tobacco surcharge violated ERISA because it did not comply with the “requirement that participants be retroactively reimbursed if they complete that alternative option.” The health plan at issue stated:

If you or your dependents(s) ․ enroll in a smoking cessation program with either CVS Caremark ․ or with your Medical Carrier, you will be eligible to have the tobacco surcharge removed upon completion[.] Adjustments to the tobacco user surcharge will be on a prospective basis once the smoking cessation program is completed. There will be no retroactive adjustments to the tobacco user surcharge.

Id. at 523 (alterations made by Lipari-Williams court).

The court—ruling on a motion to certify class—observed that an alternative standard may be deemed reasonable only where “ ‘[t]he full reward under the outcome-based wellness program must be available to all similarly situated individuals.’ ” Id. at 522 (quoting 29 C.F.R. § 2590.702(f)(4)(iv) (emphasis added by Lipari-Williams court)). The court then turned to the 2013 preamble, stating: “The ‘full reward’ requires retroactively reimbursing a participant that completes the alternative standard. In particular, ‘if a calendar year plan offers a health-contingent wellness program with a premium discount and an individual who qualifies for a reasonable alternative standard satisfies that alternative on April 1, the plan or issuer must provide the premium discounts for January, February, and March to that individual.’ ” Id. at 522-23 (quoting 78 Fed. Reg. 33158, at 33163).

Then, in Mehlberg v. Compass Grp. USA, Inc., 2025 WL 1260700 (W.D. Mo. Apr. 15, 2025), the same court took up the same issue, though this time at the motion to dismiss stage. The plaintiffs in that case again alleged that ERISA requires retroactive refunds or rebates of tobacco surcharges. Id. at * 4. The health plan in that case allowed an enrollee to “avoid the surcharge on a going-forward basis only.” Specifically, the plan provided that “[t]he surcharge will be removed beginning in the first of the month that Compass Group receives notification that you have been compliant with the Virgin Pulse Tobacco Cessation Program, or as soon as administratively possible.”²¹

The court relied straightforwardly on Lipari-Williams in denying the motion to dismiss. Id. at *4-*5. Indeed, the court quoted the passage from Lipari-Williams (quoted above) in which the earlier court had found the 2013 preamble to establish a retroactivity requirement. Id. “Under this precedent,” the Mehlberg court concluded, “Plaintiffs have adequately alleged that Defendant's tobacco surcharge violated ERISA because it did not offer a retroactive reimbursement of the surcharge.” Id. at *5.

Thereafter, the court went on to address the defendant's argument that “a preamble to an agency regulation is not the law and, even if it were, Plaintiffs’ interpretation [of a retroactive reimbursement] does not comport with the best reading of the statute and thus is owed no deference” following Loper Bright. Id. (addition made by Mehlberg court). The court, proceeding exclusively via block quote of the plaintiffs’ brief, opined that the 2013 preamble was not the sole basis for the ruling. Rather, it was also based upon the statutory (and regulatory) requirement of a “full reward.” Id. (citing 29 C.F.R. § 2590.702(f)(3)(iv) and (f)(4)(iv)). Still quoting from the plaintiffs’ brief, the court concluded:

[T]he addition of the word “full” removed any doubt that the “reward” was intended to apply retroactively. [Defendant] [argues] that regulatory preambles are not “legislative rules” with the independent force of law. But the preamble reflects the agency's interpretation of its own regulations. Per well-settled law, a court must accept an agency's interpretation of its own regulations as “controlling unless plainly erroneous or inconsistent with the regulation.” Auer v. Robbins, 519 U.S. 452, 461 (1997) (cleaned up).

Mehlberg, 2025 WL 1260700, at *5 (all alterations made by Mehlberg court).

Finally, little more than a month after the Mehlberg decision, a court in the Eastern District of Virginia reached the same conclusion in Bokma v. Performance Food Grp., Inc., 2025 WL 1452042, at *1 (E.D. Va. May 20, 2025). In that case, plan documents stated that “the surcharge will be removed only on a prospective basis upon completion of [the tobacco cessation program], but not for the entire plan year.” Id. at *3. Thus, the plaintiffs alleged that the defendant's “program violates ERISA's anti-discrimination provision by failing to provide retroactive reimbursement to obtain the ‘full reward’ given to similarly situated individuals.” Id.

The Bokma court found “that the reasoning of the Western District of Missouri's opinion in Mehlberg provides compelling, persuasive authority in this case, which deals with substantially similar claims and arguments.” Id. at *16. To wit, it concluded that “[t]he preamble to the DOL regulations and the 2018 DOL position[²² ] cited by Plaintiffs both state that the ‘full reward’ must be granted to all individuals who satisfy the reasonable alternative standard,” and that, when the court afforded Auer deference to the DOL's interpretations of its own regulations, the plaintiff had plausibly alleged an ERISA violation.²³

 Compliance of the NAL Health Plan

As may be clear by now, each of the above cases, as well as the example from the 2013 preamble, are factually distinct from this case in a crucial way. The 2013 preamble states that a person who meets the reasonable alternative standard mid-year must be given the full reward, suggesting as an example that where “an individual who qualifies for a reasonable alternative standard satisfies that alternative on April 1, the plan or issuer must provide the premium discounts for January, February, and March to that individual.” 78 Fed.Reg. 33158-01, at 33163. The preamble passage makes clear that this rule is necessitated because “an individual may take some time to request, establish, and satisfy a reasonable alternative standard.” Id. The full reward is not “available” in any realistic way to those completing the reasonable alternative standard unless there is retroactive reimbursement, because it will invariably take some time to meet that standard.²⁴ Lipari-Williams, Mehlberg, and Bokma all involve that same basic fact pattern, and an argument that a retroactive reward is required, i.e., surcharge refunds for the months before the reasonable alternative standard was met.

The NAL Health Plan is not like the example plan from the 2013 preamble or the plans in the cases discussed above in that it does not contemplate any sort of partial surcharge or partial refund. Rather, the opportunity for an individual to complete the tobacco cessation program to avoid the 2019 surcharge is provided throughout 2018. A person who meets the reasonable alternative standard (i.e., completion of the tobacco cessation program) cannot receive anything but the full reward. If an individual identifies as a tobacco user in 2018 open enrollment, and did not complete the tobacco cessation program in 2018, the tobacco surcharge will be levied against them in 2019. Completing the tobacco cessation program in 2019 will not affect the 2019 surcharge, in whole or in part.

This nuance appears to have been lost on Plaintiff. His argument is centered entirely around the 2013 preamble example and the effect of the phrase “full reward.” Indeed, his primary argumentative strategy is to repeat the phrase “full reward” over and over again—he even tries italicizing it, bolding it, or even occasionally changing it to “full award.” But this emphasis on the “full reward” is misguided, given that nothing less than the full reward is ever available or provided under the NAL Health Plan.²⁵

The question for this court is whether the NAL Health Plan complies with the requirements of ERISA. More specifically, does the Plan's tobacco surcharge program provide a compliant reasonable alternative standard, such that the imposition of the tobacco surcharge does not run afoul of ERISA's nondiscrimination mandate?

Of note, this question does not call upon the court to practice any sort of Auer deference. Under that principle, courts will defer “to agencies’ reasonable readings of genuinely ambiguous regulations.” Kisor v. Wilkie, 588 U.S. 558, 563 (2019). The DOL's interpretation of the “full reward” requirement is embodied in the 2013 preamble and in its various briefs in the Macy's case.²⁶ But, as explained above, these interpretations concern situations where a partial refund (rather than a full reward) is offered from satisfaction of an alternative standard, which is not the case here. In other words, even if the court was inclined to defer to those interpretations, they would not be of any help in deciding the question before it.

Furthermore, it is important to recognize that the operative requirement appears in essentially identical form in both the DOL regulations and the PHSA. Compare 29 C.F.R. § 2590.702(f)(4)(iv) (“The full reward under the outcome-based wellness program must be available to all similarly situated individuals.”) with 42 U.S.C. § 300gg-4(j)(3)(D) (“The full reward under the wellness program shall be made available to all similarly situated individuals[.]”). “In practice, Auer deference is Chevron deference applied to regulations rather than statutes.” Decker v. Nw. Env't Def. Ctr., 568 U.S. 597, 617 (2013) (Scalia, J., concurring in part and dissenting in part). In the past, the fact of overlapping regulations and statutes may not have mattered—deference is deference, after all. But now, deferring to the DOL's interpretation of its regulation under Auer, when deference to the DOL's interpretation of the effectively identical language of the PHSA would be forbidden, would seem to be an improper end run around Loper Bright. In any event, as stated above, the DOL's interpretations are not particularly germane to the instant case, and further consideration of Loper Bright’s impact on Auer is not needed.

Under the NAL Health Plan, the original outcome-based standard is that an individual is not a tobacco user. If an individual meets that standard, they can avoid the tobacco surcharge. ERISA, via the incorporated provisions of the PHSA, requires that “[t]he full reward under the wellness program shall be made available to all similarly situated individuals,” and that that requirement is not satisfied unless the wellness program allows for “a reasonable alternative standard ․ for obtaining the reward for any individual for whom, for that period, it is unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard[.]” 42 U.S.C.A. § 300gg-4(j)(3)(D). Under the NAL Health Plan, the reasonable alternative standard is completion of the tobacco cessation program.

The full reward under the NAL Health Plan's wellness program is clearly “made available” to all similarly situated individuals, including those who must resort to the reasonable alternative standard because they are tobacco users. Those individuals have a year to complete the tobacco cessation program in order to fully and completely avoid the tobacco surcharge in the following year. New employees (who would not have been able to complete the cessation program in the previous year) are provided a six-month grace period in which to complete the program, thus ensuring that the opportunity to meet the reasonable alternative standard and earn the full reward is available to everyone.

To be sure, the wellness program essentially works on a one-year offset. But Plaintiff is unable to point to any language in ERISA (or elsewhere) that suggests such a program is prohibited. On the contrary, designing the program in this fashion actually serves to avoid the issue addressed in the 2013 preamble. And it might be important to note that the program is retrospective in nature for both those who would satisfy the original outcome-based standard and those who would satisfy the reasonable alternative standard. In other words, the question at open enrollment is not whether a person intends to use tobacco in the upcoming year, but whether they used tobacco products in the prior six months—a retrospective inquiry. The reasonable alternative standard thus parallels the otherwise applicable standard, in that it also turns on conduct in the prior year.

Accordingly, Defendants’ Motion to Dismiss is GRANTED with respect to Plaintiff's claim that the full reward under the program in question was not available to all similarly situated individuals. Counts V and VII of the Complaint are therefore dismissed.

 Count VI – Notice of the Reasonable Alternative Standard

In addition to the substantive requirements of a wellness program, ERISA mandates that “The plan or issuer involved shall disclose in all plan materials describing the terms of the wellness program the availability of a reasonable alternative standard ․ required under subparagraph (D). If plan materials disclose that such a program is available, without describing its terms, the disclosure under this subparagraph shall not be required.” 42 U.S.C. § 300gg-4(j)(3)(E). Plaintiff alleges that Defendants failed to comply with this requirement.

In their Motion to Dismiss, Defendants broadly request dismissal of all of Plaintiff's claims. However, they make no specific argument with respect to Plaintiff's notice claim, nor do they make one in their Reply. The court cannot discern anything from the dismissal of Plaintiff's substantive tobacco surcharge claims that would necessitate dismissal of the notice claim. It may be that the NAL Health Plan failed to comply with the notice requirements notwithstanding the fact that its wellness program was otherwise compliant. Thus, Defendants having made no particular argument relating to notice, that claim will not be dismissed. Likewise, Plaintiff's Count VII claim that Defendants’ illegal collection of the tobacco surcharge was also a fiduciary violation will survive. See supra n.18.

IT IS THEREFORE ORDERED THAT:

(1) Defendants’ Motions for Leave to File Notice of Supplemental Authority (#[19], #[23], #[28]) are GRANTED.

(2) Plaintiff's Motions for Leave to File Notice of Supplemental Authority (#[20], #[21], #[26], #[29]) are GRANTED.

(3) Defendants’ Motions for Leave to File Response to Plaintiff's Notice of Supplemental Authority (#[22], #[25], #[27], #[30]) are GRANTED.

(4) Defendants’ Motion to Dismiss (#[13]) is GRANTED in part and DENIED in part as described herein.

(5) This matter is referred back to the magistrate judge for further proceedings consistent with this order.

FOOTNOTES

1.   Additionally, Plaintiff (#20, #21, #26, #29) and Defendants (#19, #23, #28) have filed Motions for Leave to File Notice of Supplemental Authority. Defendants have also filed Motions for Leave to File a Response to Plaintiff's Motions (#22, #25, #27, #30). Those Motions are all GRANTED; the court will consider the supplemental authority and the parties’ arguments related thereto.

2.   IRS rules require an employer to annually file a form 5500, through which it “report[s] information on the qualification of the plan, its financial condition, investments and the operations of the plan.” Form 5550 corner, https://www.irs.gov/retirement-plans/form-5500-corner (last accessed May 30, 2025); see 29 U.S.C. § 1023.

3.   Technically, the 2020 document uses the term “accounts” rather than “amounts.”

4.   The Amended Complaint also makes reference to the balances “conflicting” or “not matching,” but Plaintiff does not pursue any particular claim on that basis.

5.   Plaintiff's claim related to the exhaustion of forfeitures is included in his Amended Complaint, but does not appear specifically under his subheading for Count II. However, he makes clear in his Response that the failure to exhaust forfeitures was an alleged instance of imprudence.

6.   The decision in Hutchins II also rested in part on a separate section of the plan, not discussed in the original decision. The court relied upon § 17(b) of the plan, which stated: “The Company shall have complete and unfettered discretion whether an expense of the Plan or Trust shall be paid by the Participating Companies or out of the Trust Fund, and this Section shall not be construed to require the Participating Companies to pay any portion of the expense of the Plan.” Hutchins II, 2025 WL 404594, at *4. The court reasoned that the plaintiff's theory would require it to find that the plan language vesting forfeiture allocation discretion, in conjunction with ERISA fiduciary requirements, would override § 17(b)—a result it found untenable.

7.   To Plaintiff's credit, his Response contains no references to discretionary contributions.

8.   “According to Plaintiff: (1) forfeitures should only have been used to satisfy Plan expenses or reallocated to participants and never to offset NAL's contribution.” Def. Br. at 23-24 (emphasis in original). “But his theory of liability, that forfeitures can never offset employer contributions has no support under the law, directly conflicts with the Plan[.]” Id. at 24 (emphasis in original). “But here, Plaintiff argues that forfeitures should never be used for employer contributions, only for Plan expenses and reallocation to participant accounts.” Id. at 25 (emphasis in original). “Plaintiff's claim that NAL can never use forfeitures to offset employer contributions, and instead must use forfeitures to give him more than the 401(k) Plan provides, is in direct contradiction with the Plan terms.” Id. at 29 (emphasis in original).

9.   The decision in McManus II was released after initial briefing on Defendants’ Motion to Dismiss was complete, such that Plaintiff alerted the court to that decision via Notice of Supplemental Authority (#21). Defendants filed a Response (#25) to that Notice, in which they argued that McManus involved nonelective employer contributions, whereas this case involves elective employer contributions, and that distinction “renders McManus II irrelevant.” The court sees two problems with this argument. First, the Amended Complaint in this case explicitly references nonelective contributions. While it is true that Plaintiff does reference discretionary contributions on occasions, there can be no question that his claims contemplate offsets of nonelective contributions. Second, when the McManus I court dismissed the plaintiff's claims—which, of course, involved the same nonelective contributions later at issue in McManus II—Defendants referred to that case as “virtually identical” to this one. Only now that the McManus result is different do Defendants find it irrelevant.

10.   It is questionable whether that is the proper takeaway from Loomis. Regardless, it is undisputed that ERISA imposes no affirmative obligation for an employer to pay plan expenses.

11.   The theory put forth in Paragraph 53 may explain why Plaintiff alleged the amount by which NAL's nonelective contributions were offset by remaining forfeitures in 2020 through 2022, since in those years, administrative expenses were fully covered by forfeitures before they were otherwise allocated.

12.   As discussed earlier, the entire concept of “offsetting” a discretionary contribution makes little sense, given that Defendants were free to simply make no discretionary contribution.

13.   Defendants also reraise their argument concerning the distinct identities of the Administrative Committee and NAL, arguing that the Committee acting to the benefit of NAL is not the same as the Committee acting to the benefit of itself. The court again rejects that argument.

14.   Section 406 of ERISA is codified at 29 U.S.C. § 1106.

15.   The deadline, it appears, was different in certain years.

16.   This is one of many examples of instances in the Amended Complaint in which Plaintiff purports to be quoting from “NAL Health Plan Documents.” Plaintiff attaches no exhibits to his Amended Complaint, and most of his quotes cannot be found in the lone document that Defendants provide.

17.   The tobacco surcharge under the NAL Health Plan, the parties agree, is an outcome-based wellness program. See 29 C.F.R. § 2590.702(f)(1)(v) (“An outcome-based wellness program is a type of health-contingent wellness program that requires an individual to attain or maintain a specific health outcome (such as not smoking or attaining certain results on biometric screenings) in order to obtain a reward.”). The reasonable alternative standard—completion of the tobacco cessation program—is an activity-only standard, as it may be satisfied regardless of whether it actually results in tobacco cessation. 29 C.F.R. § 2590.702(f)(1)(iv) (“An activity-only wellness program is a type of health-contingent wellness program that requires an individual to perform or complete an activity related to a health factor in order to obtain a reward but does not require the individual to attain or maintain a specific health outcome.”).

18.   Plaintiff alleges in Count VII of the Amended Complaint that Defendants’ illegal collection of the tobacco surcharge was also a fiduciary violation. As this claim is based on the same underlying theory of a noncompliant wellness program, Count VII rises and falls with Counts V and VI.

19.   In Loper Bright, the Supreme Court overturned Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), thereby eliminating the practice of Chevron deference, under which courts were required to defer to an agency's interpretation of a statute where Congress had not spoken with specificity on the matter. Loper Bright, 603 U.S. at 371-76. Following Loper Bright, courts engage in standard statutory interpretation, with no deference involved. Id. at 395.

20.   Auer v. Robbins, 519 U.S. 452 (1997).

21.   In its order on the motion to dismiss, the Mehlberg court “assume[d] familiarity with the applicable facts” and therefore did not describe the surcharge or the reasonable alternative standard with specificity. 2025 WL 1260700, at *1. Accordingly, these descriptions are taken directly from the complaint in that case. Mehlberg v. Compass Grp. USA, Inc., No. 24-CV-04179, Dkt. 1 (W.D. Mo. Oct. 9, 2024).

22.   The 2018 DOL position referenced by the Bokma court was an opposition brief in Sec. of Labor v. Macy's, Inc., No. 17-CV-541, Dkt. 41 (S.D. Ohio Oct. 31, 2018). The DOL brief (Dkt. 77) from that same case upon which Plaintiff relies in this case, while filed nearly six years later, takes the same basic position, i.e., that “in order for the reward to be available to all similarly situated individuals, the plain language of the regulations required reimbursement of the Tobacco Surcharge for the entire Plan year to Plan participants who completed a tobacco cessation program.”

23.   The Bokma court also rejected the notion that Loper Bright had any bearing on the result. Bokma, 2025 WL 1452042, at *8-9.

24.   Though outside the scope of this Order, it is fair to question whether preamble language implies a strict retroactivity rule—i.e., even an individual who does not pursue the reasonable alternative standard until November of a given year is entitled to 10 months of surcharge refunds—as opposed to a rule of reasonableness.

25.   For their part, Defendants also raise a number of abstruse arguments—many of which were rejected in the cases discussed above—such as suggesting that the issue turns on the definition of the word “adhere” or the word “participating,” or insisting that the dropping of the word “full” after the statute's use of “full reward” in the first instance is somehow meaningful.

26.   In 2018, the DOL wrote: “Macy's’ theory contradicts the anti-discrimination provisions of ERISA § 702, 29 U.S.C. § 1182, because it would allow plans to discriminate for a portion of the plan year.” Macy's, No. 17-CV-541, Dkt. 41. This statement is in line with the 2013 preamble example in that it contemplates partial rewards (or partial discrimination), and is thus factually distinct from the issue in this case for the same reasons.

COLIN S. BRUCE, UNITED STATES DISTRICT JUDGE