Pension & Benefits News Claims challenging application of phantom account offset to reduce retirement benefits time-barred
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Wednesday, February 20, 2019

Claims challenging application of phantom account offset to reduce retirement benefits time-barred

By Pension and Benefits Editorial Staff

A retiree's challenge to a plan administrator's application of a phantom account offset as an impermissible reduction of benefits was time barred, according to the U.S. Court of Appeals in New York (CA-2), because the claim accrued 12 years before the suit was filed. In addition, the court stressed that the plan administrator did not breach his fiduciary duties under ERISA by continuing to apply the phantom account offset to plan participants who failed to bring timely denial of benefit claims.

Phantom account offset reduced retirement benefits. The administrator of pension plan sponsored by Xerox Corporation implemented a method of calculating retirement benefits for rehired employees that effectively reduced their benefits by the amount of prior lump-sum disbursements and other additional sums that approximated the interest that the disbursement would have earned had they remained in the plan (i.e., “phantom account offset"). The phantom account offset was initially implemented by the administrator without proper plan amendment or notice to rehired employees. The phantom account offset was eventually added by amendment of the plan when Xerox issued its 1998 summary plan description (SPD), which explained the mechanics of the offset. The Second Circuit ruled that the phantom account offset could not be applied to employees rehired prior to the issuance of the 1998 SPD (Frommert v. Conkright). Employees who had challenged the practice were allowed to recover for the denial of benefits. However, the court refused to issue a judgment declaring that the phantom account offset was prohibited by ERISA or enjoining its application in calculating the benefits of any plan participants.

Following the Frommert ruling, the plan administrator continued to apply the phantom account offset to rehired employees who were not parties to the litigation. Among the parties to whom the phantom account offset applied was an employee who began working for Xerox in 1972, left the company in 1983 (receiving a $30,000 lump-sum distribution), returned to Xerox in 1985, and then retired in 2008. The plan amendment implementing the phantom account offset was incorporated into the SPD in 1998, but the retiree did not know that his benefits were subject to reduction until January 2009 when he received a pension calculation statement.

The retiree subsequently brought suit claiming that: (1) application of the phantom account offset impermissibly reduced his pension benefits, and (2) the continued application of the phantom account offset after Frommert was a breach of the plan administrator's fiduciary duty. A federal trial court concluded in 2013 that the denial of benefits claim became untimely in 2004, as the plan incorporated the phantom account offset in 1998 and the applicable state statute of limitations was six years (Frommert v. Conkright). However, the court ruled that the fiduciary duty claim was not time-barred, as the statute of limitations began running only when the plan administrator's decision to ignore Frommert became known to the retiree, in January 2009.

In a subsequent motion for summary judgment, the plan administrator claimed it was not a breach of fiduciary duty to continue to apply the phantom account offset because the retiree could no longer bring a timely denial of benefits claim, and Frommert allowed for application of the reduction method to retirees whose claims were untimely. However, the court, determining that the plan administrator was mandated by Frommert not to apply the phantom account offset to employees rehired before 1998, issued summary judgment to the retiree.

Final judgment was entered in May 2017. The retiree appealed the court's 2013 dismissal of the denial of benefits claim. The fiduciary appealed the 2017 decision granting summary judgment to the retiree.

Denial of benefits claim time-barred. In affirming the trial court's dismissal of the denial of benefits claim, the Second Circuit initially noted that an ERISA denial of benefits claim ordinarily accrues when a plan denies a beneficiary's formal application for benefits, or upon a clear repudiation by the plan that is known, or should be known, to the participant, regardless of whether a formal application for benefits has been filed. The appeals court agreed with the trial court that the plan administrator clearly and unambiguously repudiated the retiree's benefit claim in 1998 when the SPD was updated to state that the phantom account offset would be used for all rehired employees participating in the plan. Applying New York's six-year statute of limitations for contract actions as the most analogous to ERISA denial of benefit claims, the appeals court confirmed the retiree's claim became untimely in 2004.

Application of phantom account offset did not constitute fiduciary breach. On appeal, the plan administrator argued the Frommert did not prevent application of the phantom account offset to plan participants who were not parties to the litigation. The Frommert court stated that “the phantom account may not be applied to employees rehired prior to the issuance of the 1998 SPD.” While agreeing with the trial court that the cited sentence seemed like a clear directive, the appeals court concluded that, read in context, the sentence was much more limited and did not direct the plan administrator to stop applying the phantom account offset to every single employee rehired before the 1998 SPD was issued. Rather, the court explained, the statement regarding application of the phantom account offset to employees rehired prior to the issuance of the 1998 SPD was made in the context of a holding that the employees should win on their individual denial of benefit claims (italics by court).

The appeals court further noted that in 2008, the Second Circuit held that the phantom account offset could be applied to plan participants who had waived their rights to bring ERISA claims (Frommert v. Conkright (Frommert II)). Finding timeliness to be as good a defense as waiver, the court held that the plan administrator was not precluded from applying the phantom account offset to plan participants who did not bring timely claims. The court would not allow the retiree to circumvent the plan administrator's defense by merely recharacterizing the denial of benefits claim under a theory of fiduciary breach.

SOURCE: Testa v. Becker (CA-2).

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