Employers that sponsor defined benefit pension plans are all-too-familiar with the concept of volatility. Gyrations in the stock and bond markets, interest rate fluctuations, and new PBGC premium amounts and mortality tables are but a few examples. In contrast, one area where plan sponsors may be complacent, particularly in recent years, is in regard to their plan document. Yes, that musty, dusty, decades-old plan document that gets trotted out from time to time, typically when a thorny issue arises or when a judgment needs to be made. The reason for the optimistic feeling is that plan language has tended to stay relatively static, particularly over the past few years, which may lead plan sponsor to have a comfortable relationship with their plan document. The plan document may be like a vintage family car…it may not run perfectly, but over time the owner has become comfortable with its idiosyncratic quirks. Well, a recent court case involving some seemingly “benign” plan language is a good reminder that a regular check-up of the plan document by you and your counsel is always a good idea.
During the summer of 2015, the Court of Appeals for the Second Circuit (2nd Cir.) ruled that the use of “five years of service” as the normal retirement age under an employer’s cash balance retirement plan violated ERISA because “five years of service” had no reasonable relationship to normal retirement within the employer’s industry. The case, Laurent v. Pricewaterhouse Coopers LLP, Docket No. 14-1179, was decided by the 2nd Cir. U.S. Court of Appeals on July 23, 2015. Recently, the U.S. Supreme Court, on January 25, 2016, denied PricewaterhouseCoopers’ (“PwC”) petition to review the decision. As a result, plan sponsors are well advised to become familiar with the details of the case, to see if their plan document has similar language that may be of concern.
The case deals with the oft-litigated issue of when a cash balance plan must provide certain “whipsaw” payments to plan participants. (The case concerned a set of facts that arose prior to the passage of the Pension Protection Act of 2006, which eliminated mandatory whipsaw payments.)
By way of background, ERISA defines “normal retirement age” as the earlier of “the time a plan participant attains normal retirement age under the plan” or the statutory default of age 65 or the fifth anniversary of plan participation. The PwC retirement plan defined normal retirement age as the earlier of the date a participant attains age 65 or completes five years of service. The plaintiff argued that an employee terminating after five years of service was entitled to a “whipsaw payment”-- the difference between the hypothetical value of a cash balance plan account at any given time and the value of the account as an annuity payable at normal retirement age. In practice, employees did not receive “whipsaw payments” because PwC claimed that normal retirement date was the payment date, hence there should be no whipsaw.
The US District Court for the Southern District of New York initially ruled on this case, finding that the plan violated ERISA because it defined "normal retirement age" as years of service rather than a specific age. Therefore, the court said that the default retirement age was the statutory 65, and employees should be entitled to the additional payments. The district court also said the plan's normal retirement age was invalid because it was not clearly laid out in the summary plan description. The 2nd Cir. agreed that the plan provisions violated ERISA, but for different reasons than those cited by the district court. It said that the plan’s definition of “normal retirement age” as five years of service violated ERISA not because five years of service is not an “age,” but because it bears no plausible relation to “normal retirement.”
It may be that the import of this case applies to the specific area addressed—i.e., whipsaw cases, and PPA legislation effectively deals with this concern altogether. It is also noteworthy that this case is at odds with similar cases decided in other federal Circuits, like the 7th Circuit. Moreover, a provision in the 2015 Appropriations Act provided a “clarification” of the meaning of normal retirement age that applies retroactively. The new statute provides that, notwithstanding any other provision of ERISA, an “applicable plan” does not violate any requirement of ERISA, or fail to have a uniform normal retirement age, solely because the plan defines normal retirement age as the earlier of (i) an age otherwise permitted under ERISA section 3(24) or (ii) 30 (or more) years of service. “Applicable plan” is defined as any plan that sets normal retirement age on one of those two bases. At the very least, however, the case is a reminder that all provisions of a plan should be reviewed from time to time to make sure that the plan language is up to date.
Additionally, this case is particularly timely because the Internal Revenue Service (“IRS”) has announced its intent to discontinue its determination letter program for individually designed retirement plans at the end of 2016. As a result, plan sponsors will no longer have the ability to show their plan language to the IRS until they are ready to terminate the plan. In the meantime, having counsel review the plan document from time to time will be the best form of protection.
So, like a periodic check-up of that vintage family car, plan sponsors are well advised to look under the hood and kick the tires of that defined benefit plan document, even one that has not been changed in some time. A prudent review will go a long way towards ensuring that you will not find yourself sitting on the roadside of the judicial highway, after being pulled over for operating a retirement plan without proper provisions.