A proposed class action lawsuit has been filed against Host International, a provider of meals to various travel and entertainment venues, alleging it and other plan fiduciaries refused to properly defer compensation of certain employees to the HMSHost 401(k) Retirement Savings Plan and Trust pursuant to the terms of the plan document.
The complaint notes that the plan’s adoption agreement provides that participants “may elect to have a portion of their compensation contributed to the plan on a before-tax basis” with a deferral limit of 75% of their compensation. The plan document defines “compensation” as “wages,” as set forth in the Employee Retirement Income Security Act (ERISA) Section 3401(a). That section defines “wages” as “all remuneration … for services performed by an employee for his employer,” while Section 3401(f) provides that, “[f]or purposes of subsection (a), the term ‘wages’ includes tips received by an employee in the course of his employment.”
The complaint also points out that the plan’s summary plan description (SPD) says “all reported gratuities [are] eligible compensation when determining the eligible contribution amount for the plan.”
The basis for the lawsuit is Host International’s Tips Policy. As explained in the complaint, Host requires tipped employees to report credit card tips recorded by customers on their credit card receipt into the point of sale system. The Tips Policy then requires that the credit card tips be paid in cash to the employee at the end of his or her shift. Host International does not provide its employees with the option to receive those tips later with their compensation paid through payroll. The plaintiff says this interferes with his and proposed class members’ ability to defer income under the terms of the plan.
The plaintiff reached out to benefits staff about the plan’s failure to follow his election to defer 25% of income under the plan. A claims administrator sent him an email that said, “You correctly point out that the plan, at Section 5.03, states that a participant is not permitted to make deferral contributions in excess of his ‘effectively available compensation’ and that ‘effectively available compensation’ is a participant’s compensation remaining after all applicable amounts have been withheld.” Later in the email, she writes that “it is clear that deferrals of compensation under the plan cannot be made from a mere disbursement or payment of unreported tips to you, but rather must be made on ‘effectively available compensation’ in your regular paycheck.”
The claims administrator concludes: “In other words, even though reported tips are included in compensation for purposes of determining the overall amount of deferrals/contributions to the plan, ‘counting’ tips as compensation does not mean the tip amounts are effectively available to withhold deferrals from. As such, to the extent that regular wages are insufficient to withhold elected deferrals from, the plan allows for a participant’s contribution of after-tax amounts.”
According to the complaint, the email goes on and appears to assert that the credit card tips, which Host International requires its tipped employees to report before paying them back out and uses to determine their taxable earnings, are somehow not “employee-reported tips.” The lawsuit says explanations in her letter “are illogical.”
The lawsuit argues that there is “nothing in federal or state withholding laws prohibiting defendants from using a separate mechanism to allow plan participants to defer their reported credit card tips according to their elections. Likewise, there is no provision in the plan that carves out reported credit card tips from being included as ‘effectively available compensation’ qualifying for pre-tax deferrals.”
The plaintiff followed up with a letter to the retirement committee and plan administrator. The response upheld the claims administrator’s conclusion and stated, in part, “[a]s we have previously explained in [the claims administrator’s letter] and in prior correspondence, an employer cannot, under the terms of the plan and federal tax law, make your elected pre-tax deferrals of tip compensation out of anything other than your regular wages paid through payroll that remain after taking deductions for all required tax withholdings and other authorized deductions from your pay.”
The plaintiff then filed the lawsuit alleging that the defendants acted contrary to the plan document by preventing him and others from contributing a portion of their reported tips based on their deferral elections. In addition, the lawsuit alleges that by denying plan participants who are tipped employees the right to defer reported tips, the defendants have violated the anti-discrimination provision of ERISA Section 510. “While highly compensated and/or non-tipped employees are permitted to apply their pre-tax deferral election to the entirety of their reported income, tipped employees such as plaintiff are only permitted to defer a portion of their reported income,” the lawsuit states.
The plaintiff points out that denial of a 401(k) plan participant’s right to defer his or her reported tips not only contradicts the plan document, it potentially jeopardizes the tax-qualified status of the plan.
He further accuses the defendants of failing to prudently consider their interpretation and administration of the plan document and adopting “an arbitrary position … thereby avoiding the need to follow the participant’s election to defer a percentage of the income.”
As a result of the defendants’ alleged fiduciary breaches, the lawsuit says the plan has suffered losses from the contributions from tipped participants, their matching contributions and earnings those contributions would have accrued as plan assets.
Among other things, the lawsuit asks for an accounting of the amounts that would have been contributed to the plan and the earnings those amounts would have generated but for the defendants’ breaches and disgorgement, restitution and/or restoration to the plan of those amounts.
Host International has not yet responded to a request for comment.