Pension & Benefits News Recalculation of improperly offset benefits and award of prejudgment interest upheld
Wednesday, March 6, 2019

Recalculation of improperly offset benefits and award of prejudgment interest upheld

By Pension and Benefits Editorial Staff

A federal trial court did not abuse its discretion in calculating the value of the improperly offset benefits of reemployed employees pursuant to an equitable remedy that, in treating the employees as newly hired, did not offset their prior distributions, but also did not fully credit their earlier service, according to the U.S. Court of Appeals in New York City (CA-2). The trial court's award of prejudgment interest at the federal prime rate also was affirmed as an appropriate balance of the need to redress the employees' claims without providing them with a windfall.

Calculation of offset benefits of reemployed employees. The case was a continuation of a long-running dispute centered on the calculation of the current benefits, under the pension plan of Xerox Corporation, for employees who, after leaving the company and receiving a lump-sum distribution of benefits, returned to the company. The plan administrator implemented a method of calculating the retirement benefits of the rehired employees that effectively reduced (i.e., offset) their benefits by the amount of the prior lump-sum disbursements. However, the offset method was implemented by the plan administrator without proper plan amendment or notice to the rehired employees.

In 2013, the Second Circuit determined that the plan administrator's method of calculating the employees' current benefits violated ERISA's notice requirements and thus, could not be applied. The appeals court remanded the case, charging the trial court with determining whether there was an appropriate equitable remedy that could provide appropriate benefits (i.e., “new benefits”) to the reemployed employees without resort to plan interpretation.

On remand, the trial court, selecting the equitable remedy of reformation, determined that the new benefits were to be calculated as it the employees had been newly hired on their return to Xerox (“new hire” remedy) (Frommert v. Becker, 153 F. Supp 3d 599, DC NY (2016)). Under the new hire method, the returning employees' benefits would be determined without any reduction to account for the prior benefit distributions, but also without any credit for prior years of service with Xerox. The court rejected alternative methods under which the unadjusted value of the employees' original benefits would have been subtracted from their new benefits, explaining that the new hire remedy properly accounted for the time value of money and properly compensated the employees without providing them with double benefits for the same period of service.

In a separate decision, the trial court further determined that the employees were entitled to prejudgment interest at the federal prime rate of 3.5% (Frommert v. Becker, 216 F. Supp 3d 309, DC NY (2016)). The federal prime rate was considered a balance between the 9% New York statutory rate, advocated by the employees, and the 0.66% federal post-judgment rate, recommended by the plan administrator.

The employees appealed, challenging the new hire remedy and the assigned interest rate as inadequate. The appeals court affirmed, concluding that the new hire remedy and the federal prime interest rate were proper exercises of the trial court's discretion.

New hire remedy not an abuse of discretion. On appeal, the employees, stressing that the new hire method did not fully account for their years of service with Xerox, argued that the trial court should have chosen an equitable method for calculating new benefits that was more favorable to them. In determining that the trial court did not abuse its discretion in adopting the new hire method, the appeals court noted the inadequacy of the alternative expected value and unadjusted value methods, which fail to account for the time value of money, and a no-offset method, which would have resulted in a windfall to the employees.

The employees further maintained that the trial court erred in refusing to consider the equitable remedies of surcharge and estoppel, which could have resulted in higher benefits. The trial court considered, but rejected surcharge and estoppel as unnecessary, given its adoption of the new hire method. Similarly, the appeals court explained that, as the new hire method was not an abuse of discretion, it was not compelled to address the comparative merits of surcharge or estoppel.

Prejudgment interest struck appropriate balance. In next affirming the award of prejudgment interest at the federal prime rate, the appeals court stressed the trial court's challenge of fully compensating the employees for their actual damages, while not providing them with an undeserved windfall. The trial court determined that the 3.5% federal prime rate struck an appropriate balance and fairly compensated the employees. The appeals court agreed, concluding that the trial court, in exercising its broad discretionary power, carefully considered all relevant factors in deciding that prejudgment interest was warranted and thoroughly explained its reasoning for using the federal prime rate.

SOURCE: Frommert v. Conkright (CA-2).

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