The Surprising Truth Behind Your Employers 401(k) and Vesting Schedule - it may not be what you think
- Daniel Harris
- Oct 22
- 5 min read
Updated: Oct 22
Most employees — including physicians — assume employer 401(k) contributions are a generous benefit, a way companies help staff save for retirement. But here’s the truth almost no one outside of lawyers and plan administrators understand: employers don’t contribute out of generosity — they do it to protect their own ability to contribute.
Under IRS nondiscrimination rules, a company can’t run a retirement plan where executives and high earners reap most of the benefits while lower-paid employees contribute little or nothing, creating an imbalance called a “top-heavy” plan. When that happens, executives and high earners must stop contributing to the 401(k) until the imbalance is corrected, effectively freezing leadership’s participation.
To prevent that, the IRS created the “safe harbor” rule: if a company contributes around 3.5% of pay to all eligible employees (via matching or direct contributions), the plan is deemed “safe.” Everyone, including top earners, can continue making maximum contributions.
So, employer 401(k) matches aren’t just perks—they’re compliance mechanisms designed to protect the company’s tax benefits while appearing generous.
The HCA Lawsuit Regarding Forfeitures and Why It Matters
In 2025, HCA Healthcare’s 401(k) plan became the subject of a class-action lawsuit. The claim: HCA improperly used forfeited employer contributions — the unvested match left behind by employees who leave before six years — to offset its future matching contributions instead of reducing participant expenses.
This isn’t just a technical dispute. It raises the question of whether large employers like HCA manage retirement plans in their employees’ best interests.
For HCA physicians, this matters deeply. The employer match exists for self-preservation, not kindness. When HCA reclaims unvested matches and uses them to fund others’ contributions rather than cut costs, it challenges fiduciary fairness.
What Are Forfeitures, How do they relate to an employer's 401(k) and vesting schedule — and Why Are They Controversial?
Most 401(k) plans have vesting schedules, determining when employees own employer contributions. Leave early, and unvested amounts — “forfeitures” — remain in the plan.
ERISA and Treasury regulations allow forfeitures to:
Reduce participant administrative expenses, or
Offset future employer contributions.
The HCA lawsuit argues that using forfeitures to reduce employer costs benefits the company at employees' expense, violating ERISA’s fiduciary spirit.
The Physician Context: Who Really Loses?
Physicians employed by large systems like HCA often face longer vesting schedules and less generous matches than peers at smaller or nonprofit organizations.
HCA’s six-year full vesting schedule (no vesting first 2 years, then gradual to 100% by year 6) is unusually long. Most large blue-chip companies vest employees immediately or within three years.
For example, CVS Health and Brookfield Corporation offer immediate 100% vesting, while others like Tenet Healthcare and Universal Health Services vest over 4-5 years.
Within healthcare, typical large employers vest 50-75% by year 2-3, but HCA’s plan has no vesting for the first two years—stingier than most.
Given that physicians often move jobs every few years (average two years at first job, six overall), many HCA physicians never fully vest and lose their match, which then subsidizes others’ future contributions.
This has been legal, but fairness in this environment is increasingly questioned.
The Broader Legal Landscape: Holland & Knight’s Defense
Holland & Knight, a leading law firm, defends employer use of forfeitures to offset contributions, citing six main arguments. Here is their article for reference: https://www.hklaw.com/en/insights/publications/2025/01/an-emerging-trend-in-erisa-class-action-litigation#:~:text=Secondly%2C%20ERISA%20does%20not%20require,legally%20required%20to%20do%20so.
Here’s a brief look and our perspective:
1986 rules and 2023 proposals allow using forfeitures to offset contributions. True, but those rules were made when 401(k)s were small ($15 billion assets, 13% participation). Today, 401(k)s hold $9 trillion with over 50% participation— intepretations for fairness and fiduciairy duty may evolve with business realities that are very different today than when these rules were first put in place in 1986.
Without using forfeitures this way, employers might stop contributing. Unlikely. No major company would eliminate matches due to morale and recruitment risks. I’ve never seen a major employer drop matches permanently in 15 years advising physicians.
Plan design decisions (like vesting) are settlor acts, not fiduciary ones. Legally yes, but courts may scrutinize if design systematically disadvantages most employees (e.g., physicians) to favor executives.
Sponsors aren’t liable if plan terms allow forfeiture use. Probably true now, but courts may increasingly consider intent and effect—especially if the design excludes many employees unfairly.
Forfeitures remain in the plan and reallocated to participants, not benefiting employers directly. This is a gray area. While money doesn’t leave the plan, reallocating forfeitures to offset employer costs can feel like self-dealing, particularly where employer market power limits employee choices.
Using forfeitures to offset contributions isn’t a prohibited “transaction” under ERISA. This is the strongest legal point, but evolving case law could challenge it.
The broader trend is toward greater scrutiny of employer practices to ensure fiduciary fairness, especially as physicians increasingly work for large systems.
From Sexual Harassment to Fiduciary Fairness: How Legal Norms Evolve
Legal norms evolve over time. Sexual harassment, once tolerated, became legally recognized and punishable through landmark cases like Meritor Savings Bank v. Vinson (1986). Society’s expectations shifted, and so did the law.
Similarly, fiduciary law is evolving. What was acceptable for small, early 401(k) plans may no longer be fair given today’s scale and employee profiles.
Courts may soon ask: “What would a reasonable employee find fair?” rather than just “Is this meet the minimal standard that might still be legal behavior?”
The Fairness Test: Profitability and Tenure
I would argue that fairness in vesting and forfeiture policies should align with:
Employee profitability: It’s reasonable to forfeit contributions if the employer hasn’t recouped recruitment costs.
Typical tenure: If an employee’s length of service is typical, continued denial of vesting becomes extraction, not business.
If forfeited dollars fund future matches instead of reducing costs, it looks more like appropriation.
For physicians, if the average tenure for a new physician is 2 years and for an experienced physician is 6 years in the industry then perhpas a vesting schedule that means many new physicians will not vest and mid career physicians may be help to an unfairly long vesting schedule without business justificaiton could over time be interpreted as not in line with the plan sponsors duty to act in the best interest of employees if the plan in practice or effect discriminate against newer employees or leaving employees to the tune of about $60 million a year.
The Irony: Holland & Knight’s Own Plan
Interestingly, Holland & Knight’s own 401(k) plan vests employer contributions 100% immediately. Their public defense of long vesting schedules contrasts with their internal practice—highlighting how even sophisticated institutions recognize what’s fair and what is potentially a good businss practice hen roles are reversed.
The Path Forward
If you’re a plan sponsor or executive, consider:
Tie vesting to real business needs. Profitability after 2-3 years supports full vesting. Longer schedules appear punitive.
Use forfeitures to reduce plan expenses, not offset contributions. This aligns legally and ethically with ERISA’s intent.
Get ahead of evolving fiduciary standards. Early adaptation can prevent costly litigation and preserve employee trust.
Closing Thoughts
HCA isn’t evil. Holland & Knight isn’t wrong. Both operate within today’s legal framework. But just as sexual harassment law shifted from tolerance to zero tolerance, fiduciary law is moving from formality toward fairness.
ERISA’s purpose was to stop employers from enriching themselves at employees’ expense. Over time, courts will shift from “Is this legal?” to “Is this fair?”
In 1986, forfeitures were an afterthought. In 2025, they’re a moral test.
For physicians dedicating careers to serving others, expecting fairness from employers isn’t radical—it’s common sense.
What about your 401(k)? Don’t leave your retirement savings to chance. Review your plan’s vesting schedule and employer match policies before you take a new job. If you suspect your employer’s practices may not be fair or compliant, consult a fiduciary expert or advisor.
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If you would like to learn more about Daniel Harris or schedule a call with D.R. Harris & Co. you can do so here and here.