By Pension and Benefits Editorial Staff
Early retirees plausibly claimed that “Early Commencement Factors” used by a pension plan to determine their reduced monthly benefit violated ERISA by not providing a benefit that was actuarially equivalent to the benefit they would have received at age 65, according to a federal trial court in Minnesota.
Early retirement benefits reduced under allegedly outdated actuarial assumptions. U.S. Bancorp maintained a pension plan that subjected participants who elected to begin retirement before age 65 to a reduction of their monthly benefit, expressed as a percentage of the benefit a participant retiring at age 65 would receive. The reduced benefit was determined through the application of Early Commencement Factors (ECFs), which, depending on a retiree’s age at retirement could reduce benefits by 38 to 90 percent of the normal retirement benefit.
Plan participants who elected to retire before attaining age 65 filed suit under ERISA, claiming that the ECFs, which were not based on currently prevailing interest rates or life expectancies, resulted in benefits that were not actuarially equivalent to the retirement benefits they would have received at age 65, in violation of ERISA Sec. 204. U.S. Bancorp, in filing a 12(b)(6) motion to dismiss, argued that ERISA does not impose a reasonableness standard, or effectively any conditions, applicable to the calculation of the ECFs.
Actuarial equivalence of accrued benefits at normal retirement age. Under ERISA Sec. 204(c)(3), in the event the accrued benefit of defined benefit plan participant is to be determined as an amount other than an annual benefit commencing at normal retirement age (e.g., a single life annuity beginning at early retirement), the amount of the distribution must be the actuarial equivalent of the accrued benefit at normal retirement age. Actuarial equivalence, as further defined in Code Sec. 411(a), Code Sec. 411(c)(3) and IRS Reg. 1.411(a)-4(a), the participants averred, requires that the actuarial calculations underlying the determination of the benefit be reasonable.
U.S. Bancorp initially argued that the participants claims arose under the IRS regulations, which do not provide a private right of action. The court, however, explained that the participants were not seeking relief for a violation of the Tax Code or the Treasury regulation, but for a violation of the actuarial equivalence requirement of ERISA Sec. 204(c)(3). Thus, the participants’ claim arose under ERISA Sec. 502(a)(3), which expressly authorizes actions to enforce provisions such as ERISA Sec. 204.
Plan not free to choose own method for determining actuarial equivalency. The bank more forcefully asserted that the participants were attempting to impose a reasonableness requirement on the application of the ECFs which ERISA does not authorize. According to the bank, ERISA specifies no underlying requirements governing the calculation and application of the ECFs.
After first noting that the participants were not seeking to impose a reasonableness requirement, but only to secure an actuarially equivalent benefit, the court rejected the suggestion that a plan is free to choose its own methodology for determining the actuarial equivalent of an accrued benefits expressed as an annuity beginning at normal retirement age. An ERISA compliant qualified plan, the court stressed, must adhere to specified valuation rules under Code Sec. 417. Further dismissing the argument that there are no underlying requirements for the calculation and application of actuarial assumption, the court noted that the regulations under Code Sec. 417 expressly specify valuation rules, including the discounting of an accrued benefit to present value at the applicable interest rate.
Treating the participants’ factual allegations as true, the court ruled that the participants had plausibly charged that the plan’s ECFs were not in conformity with the governing actuarial equivalence requirement. While discovery would indicate whether their charges were correct, the participants alleged a sufficiently plausible claim to survive the motion to dismiss.
SOURCE: Smith v. U.S. Bancorp (DC MN).
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