An HR question about 401 matches appears in a federal case - k - HR Update News that Works

HR Magazine, Jan, 2003 by Terence F. Shea

Benefits specialists may want to keep an eye on a federal court case in California that raises issues similar to those in the July 2002 HR Magazine ethics scenario, "What To Do With Bad News." In that scenario, commented on by experts in HR and benefits law, a key question was whether a company's top HR executive should argue for the use of cash instead of company stock in 401(k) plan matches because the company was facing problems that could sharply depress its stock value.

The federal case, in U.S. District Court for the Northern District of California, San Jose Division, is a complex dispute involving McKesson Corp., a San Francisco-based health products supplier. Warren Fusfeld, who chairs the Employee Benefits Practice Group of the Philadelphia law firm Wolf, Block, Schorr and Solis-Cohen LLP, and who commented on the HR Magazine scenario, says questions in the case include whether those responsible for the company's 401(k) plan and the plan of the company's recent merger partner, HBO & Co., breached their fiduciary responsibilities to plan participants by continuing to make contributions in stock rather than in cash, and by permitting the continued holding of company stock even though they became aware of the likelihood of a sharp drop in stock value as a result of the company's disclosure of certain improper and illegal accounting practices.

In an order granting defendants' motions to dismiss one of the complaints, U.S. District Judge Ronald Whyte stated that, "in theory, it could have been a breach of fiduciary duty not to make the company contributions in the form of cash, and delay converting the cash to company stock until such time as the company stock became a prudent investment." But he concluded, Fusfeld notes, that the plaintiffs had not demonstrated that any such breach had occurred under the facts and circumstances of the particular case.

Fusfeld adds that the court dismissed a claim that the fiduciaries may have been under an obligation to dispose of the company stock once they became aware of the company's problems and the likelihood that its stock price would drop. In dismissing the claim, the court said: "Not even a fiduciary acting in its fiduciary capacity is permitted to engage in insider trading."

The case is In re McKesson HBOC Inc. ERISA Litigation, N.D. Cal., No. COO-20030 RMW.