Pension & Benefits News Exclusion of commission earnings from pension benefit calculation not arbitrary and capricious
Thursday, December 13, 2018

Exclusion of commission earnings from pension benefit calculation not arbitrary and capricious

By Pension and Benefits Editorial Staff

The decision of a defined benefit plan administrator to exclude earnings from commissions when calculating the amount of a former bank loan officer’s compensation was not arbitrary and capricious under the terms of the plan, according to the U.S. Court of Appeals in Chicago (CA-7).

Benefit calculation. The defined benefit plan calculated a participant’s monthly benefit as a function of (1) the average of “compensation” in the last three and five years of employment and (2) the number of credited years of employment. “Compensation” was defined as “basic wages or salary,” excluding “bonuses, overtime, commissions or any other form of extra compensation.”

The loan officer was typically paid a small biweekly draw and a larger monthly commission. The plan administrator calculated the amount of average compensation based on the participant’s annual draws and did not include his annual earnings from commissions.

The participant disputed the decision not to include his commissions. He argued that in his case, his commissions were his wages because his monthly draw was simply an advance which he was required to pay back upon receiving his commission. The district court upheld the plan administrator’s calculation.

In a brief opinion, the appellate court concluded that based on the available record, the plan administrator’s calculation of compensation was not arbitrary and capricious. The court did reject some of the bank’s arguments. For example, the bank could not respond to the participant’s argument by saying that if the participant is correct that all his “compensation” is based on his commissions, then he is owed no pension at all. An ERISA pension plan cannot promise an illusory benefit.

However, because the participant’s employment contract was not part of the administrative record, and the participant did not directly challenge the adequacy of the administrative record, there was no evidence to support the participant’s description of his compensation structure.

SOURCE: Gunchick v. Bank of America, N.A. (CA-7).

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