For the third time in eight years, a federal district court decision endorsing Xerox’s pension plan interpretation has been reversed, setting aside judicial deference usually granted to these interpretations under ERISA and moving Xerox retirees closer to winning final benefits.
The issue in the case is how an earlier lump-sum distribution to some employees affects future benefits under the plan.
Ruling Deals Blow to Judicial Deference for Plans
The 2nd U.S. Circuit Court of Appeals in late December again vacated a federal district court judge’s ruling. The appeals court found that a proposed offset for former employees who returned to work at the company after receiving a lump-sum distribution of their retirement benefits in the 1980s under the company’s pension plan is an “unreasonable” interpretation of the company’s retirement plan that violates ERISA’s notice provisions. The case is remanded to the district court — once again.
The Western District Court of New York had ruled in favor of deferring to ERISA plan administrators’ interpretations of ambiguous plan provisions.
In the latest iteration of Frommert v. Conkright, 12-67-cv (2nd Cir., Dec. 23, 2013), a three-judge panel heard plaintiffs’ arguments opposing the Xerox plan administrator’s new interpretation, including that the district court erred in failing to permit them to conduct discovery to determine the extent to which the plan administrator’s structural conflict of interest influenced the decision-making process. The 2nd Circuit judges upheld the district court judge’s determination that the former employees were not entitled to further discovery.
The plaintiffs argued that under ERISA law, no employee’s pension benefits can be reduced by conditions that were not properly communicated in a summary plan description. Therefore, Xerox’s interpretation of the plan for returning former employees should be ignored because it failed to notify plaintiffs of a so-called phantom account offset for returning former employees who took a lump sum earlier.
Plan administrators told these participants when they were rehired that their retirement benefits would be lowered by prior distributions, using the phantom account offset. The phantom offset was never included in Xerox’s original plan, nor was it part of a plan amendment.
Annuity Formula Found Unreasonable
The 2nd Circuit found that Xerox’s annuity formula was unreasonable, apparently because the calculation (or guaranteed minimum benefit) would always be lower for a rehired employee than for a comparable employee who had not left and had not received a lump-sum payment.
“Of course, it would seem logical that an employee who already received a pension payment should receive less in the future than an employee who had received nothing. The [2nd] Circuit did acknowledge that an ERISA plan could be written ‘to change the risk borne by rehired employees or reduce such employees’ benefits in a manner that treats them worse than newly hired employees[.]’
But, the court held, the Xerox plan was not written to achieve that result,” said Patrick Begos, an ERISA attorney who posted an item about the case on Dec. 27, 2013, on the blog of his Southport, Conn., law firm, Begos Brown & Green LLP.
In addition, the appellate court said the Xerox plan violates ERISA notice provisions because the plan’s SPD said only that a lump-sum distribution “may” reduce benefits under one of the pension program’s components, the retirement income guarantee plan, which is used to calculate an annuity.
The U.S. Supreme Court in 2010 overturned a previous ruling in this case in the plaintiffs’s favor and remanded the case for further proceedings. On remand, the district court in December 2011 ruled in favor of Xerox, but the plaintiffs appealed.
Finding out More
For more information about judicial deference to ERISA plans, see ¶254 of the Pension Plan Fix-It Handbook, “Protecting the Plan Administrator’s Decisions.”