7th Circuit Includes COLAs in DB Lump Sum Calculations

In a cautionary tale about how plan documents can be written too carefully, the 7th Circuit this week, in Williams v. Rohm and Haas Pension Plan, __ F.3d __ (S.D. Indiana) (Aug. 14, 2007), affirmed both the district court’s decision to grant of class certification, and to grant summary judgment, to the participant.

The participant was fully vested in the plan sponsor’s defined benefit plan. The plan document defined a participant’s accrued benefit as:

“that portion of a Participant’s Basic Amount of Normal Retirement Pension, expressed in terms of a monthly single life annuity beginning at or after his Normal Retirement Date, that has accrued as of any determination date in accordance with Article VII.” Article VII provides a formula to calculate the “Normal Retirement Pension” as a function of the participant’s years of service and level of compensation. The accrued benefit, under the terms of the Plan, is thus the result of this formula, expressed in terms of a monthly single life annuity.

Along with the right to receive his distribution in the form of a monthly single life annuity, the plan document also provided the participant with the option to receive distribution of his accrued benefits in the form of a lump sum. If the participant selected a monthly single life annuity, the plan document provided the participant with a “supplemental benefit” of cost-of-living adjustments (COLAs). If the participant selected a lump sum, the plan document stated that the lump sum distribution was to be calculated without including the COLA supplemental benefit.

When the participant’s employment terminated after approximately 28 years, the participant elected to receive his accrued benefit in a lump sum. Following the terms of the plan document, the administrator did not include the COLA when calculating the amount of the lump sum. The participant challenged the amount of his lump sum distribution because it did not include the present value of the COLA he would have received had he chosen to receive his accrued benefit in monthly annuity payments.

Both the participant and the plan sponsor agreed that the plain terms of the plan document excluded the COLA from lump sum distributions. The Court stated that:

ERISA and the Internal Revenue Code prescribe that if a defined benefit pension plan allows for a lump sum distribution, then that distribution must equal the present value of the accrued benefit expressed in the form of a single-life annuity. 29 U.S.C. § 1054(c)(3); 26 U.S.C. § 411(c)(3); 26 C.F.R. § 1.417(e)-1(d).

The plan sponsor asked the court to interpret the term “accrued benefit” as the definition provided in the plan document, because the plan document defined accrued benefit so that it did not include the present value of the COLA in the amount of the lump sum. The plan document included the COLA as a “supplemental benefit”, which was essentially a bonus to any participant who elected to receive their distribution in the normal form benefit provided for in the plan document – the monthly annuity. The plan document was written so that participants who elected the optional form of distribution of a lump sum payment did not receive the “supplemental benefit” of the COLA.

The court stated that:

Accordingly, we stated that “[t]he term ‘accrued benefit’ has a statutory meaning, and the parties cannot change that meaning by simply labeling certain benefits as ‘accrued benefits’ and others, such as the COLA, as ‘supplementary benefits.’ ” Id. at 468. But this is precisely what
the Plan has attempted to do in this case. It seeks to disguise a penalty exacted against lump sum recipients as a bonus afforded to annuitants. In fact, it appears that the Plan attempted to write around ERISA’s limits by explicitly excluding the COLA from lump sum distributions
after learning of a district court case holding that a COLA is, per se, an accrued benefit under ERISA. See Laurenzano v. Blue Cross & Blue Shield of Mass., Inc. Ret. Income Trust, 134 F. Supp. 2d 189 (D. Mass. 2001).

The 7th Circuit concluded that:

If a defined benefit pension plan entitles an annuitant to a COLA, it must also provide the COLA’s actuarial equivalent to a participant who chooses instead to receive his pension in the form of a one-time lump sum distribution.

Of course, the opinion concludes with the court affirming the district court, which had granted summary judgment to the participant. The 7th Circuit also affirmed the district court’s certification of a class action in this case, which is the perfect place to end this cautionary tale. Because the court agreed with the participant that the plan, as written, violated ERISA in the way it calculated lump sum distributions, the plan document failure instantly creates a class action which includes all participants who had their benefits calculated this way.

[tags]Pension Protection Act, ppa, pension, retirement, defined benefit, accrued benefit, lump sum, class action, COLA, cost of living, ERISA[/tags]

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