Sept. 15 — Shipping company DHL didn't illegally take away its employees' pension benefits when it eliminated their ability to transfer an account balance from the company's defined contribution plan to its defined benefit plan, the U.S. Court of Appeals for the Ninth Circuit ruled.
In a Sept. 15 opinion, Judge Marsha S. Berzon affirmed a decision by the U.S. District Court for the Western District of Washington, finding that DHL didn't violate Section 204(g) of the Employee Retirement Income Security Act by amending its pension plans to halt the ability of participants to move funds from their defined contribution plan accounts to the company's defined benefit plan.
The court reasoned that Section 204(g), “the anti-cutback rule,” wasn't violated, because the plan amendment didn't reduce participants' “accrued benefits” in either the defined contribution or defined benefit plan.
This is now the second federal appeals court that has ruled in favor of DHL in challenges to the way the company eliminated employees' right to transfer their benefits from one plan to another after DHL acquired Airborne Express Inc. In 2010, the U.S. Court of Appeals for the First Circuit found that the elimination of this transfer right didn't violate ERISA's anti-cutback rule.
Echoing language from that opinion, the court in the instant case acknowledged that the result of the plan amendment at issue was to reduce the monthly payments to retirees in apparent violation of the protective purpose of ERISA. Claiming that it was “deeply troubled” by the case, the court decried the plan's practice of using different actuarial assumptions when calculating the annuities available under each side of the plan.
Robert Catapano-Friedman, counsel for the plan participants, was predictably disappointed by the court's ruling. But, in comments to Bloomberg BNA on Sept. 15, he highlighted the court's cautionary language, “we are pleased that the court agreed with us on what appeared to be the key issue on appeal in the case that the regulatory exception was enacted only to allow elimination of the transfer option and not to allow the reduction or elimination of our clients' accrued pension benefits.”
He added, “we are also pleased that the court acknowledged that the result in this case seems contrary to ERISA's objectives of protecting the pension benefits an employer promises to its employees.”
Counsel for DHL declined Bloomberg BNA's requests for comment.
At issue in the instant case was a so-called “floor-offset” plan that had been established by Airborne Express, an air-freight carrier that was acquired by DHL in 2003.
Under the terms of the plan, participants could accrue benefits under both a defined benefit plan, which provided benefits based on a participant's years of service and final average compensation, and a defined contribution plan, which paid benefits based on a participant's investments.
Benefits under the defined benefit plan were offset by any benefits a participant earned in the defined contribution plan. Both the defined benefit plan and the defined contribution plans permitted participants to receive benefits as a lump sum or single life annuity.
Participants could also transfer their defined contribution plan account balance to their defined benefit plan as a way of reducing the offset and receiving their full benefits under the defined benefit plan.
In 2004, DHL merged Airborne's plans into DHL's plans and amended the defined benefit plan to eliminate the provision that allowed individuals to transfer their defined contribution account balance into the defined benefit plan.
The defined contribution plan continued to allow transfers of account balances to any eligible retirement plan that would accept them, but the defined benefit plan wouldn't.
Randal Andersen, the primary named plaintiff in the instant case, and other former Airborne employees sued DHL, the pension plan, and the plan committee and alleged ERISA violations due to the elimination of the transfer provision. DHL moved to dismiss the complaint.
The district court granted DHL's motion to dismiss, finding that Treasury regulations unambiguously permitted DHL to eliminate the transfer option for the defined benefit plan.
In so ruling, the court relied heavily on the First Circuit's opinion in Tasker. In that case, an Airborne Express employee whose benefit was reduced from approximately $4,164 to $2,200 as a result of the amendment sued DHL for violations of the anti-cutback provisions.
The First Circuit found that Section 411 of the tax code and the Treasury regulations that implemented it were clear in their exemption of the elimination of transfer options from the definition of “cutbacks” under ERISA.
The Ninth Circuit agreed with the First Circuit's ruling but instead relied on the reasoning put forth by the federal government in an amicus brief that it filed in the instant case.
According to the court, the government interpreted the anti-cutback rule to apply to both parts of the “floor-offset” plan separately and argued that the amendment eliminating the transfer option didn't reduce the accrued benefit in either plan.
The court agreed, finding that the accrued benefit under the defined contribution plan, the accrued benefit for a participant consisted of his account balance and that the amendment of the defined benefit plan did nothing to effect that balance.
Similarly, the court found, the accrued benefits under the defined benefit plan were calculated by determining the participants' years of service and final average compensation and offsetting the final amount by an annuity amount based on the participant's defined contribution account.
The court ruled that the amendment to the defined benefit plan didn't change that calculation, it only prevented participants from zeroing out their defined contribution balances by transferring that amount to the defined benefit plan.
Catapano-Friedman found the court's reliance on the government's amicus brief troubling.
“It is very disappointing to us that the government in its amicus brief did not cite any legal authority for its position that the benefits at issue in this case do not become accrued benefits until after a transfer takes place, and that it took this position in this case in the first instance,” he said.
This is especially true, he added “since the government's position on this issue seems critical to the court's decision to affirm the district court's judgment for DHL and because the government's position on this matter seems contrary to fulfilling ERISA's objectives.”
Although the court affirmed a ruling in favor of DHL, it expressed its concern for the reduction in actual benefit payments that plan participants experienced as a result of the amendment.
However, the court said, this reduction was less a function of the removal of an accrued benefit and more the work of the different actuarial assumptions used by the two plans.
According to the court, in order to calculate the actual annuity payments to the plan participant under the defined contribution plan, the plan makes certain actuarial assumptions about the participant's situation.
However, when calculating the offset amount, the defined benefit plan uses a different set of assumptions that provides a higher monthly annuity amount, thus exceeding the “floor” of the defined benefit plan and preventing the participant from receiving any benefits under that plan.
The court said that this difference in actuarial assumptions was the root of the problem at issue in the case and one that could presumably be solved by Treasury regulations that would address this particular situation.
Judges Mary M. Schroeder and Richard A. Paez joined the opinion of the court.
The participants were represented by Catapano-Friedman in Boston and Michael E. Withey in Seattle.
DHL was represented by Jeremy Paul Blumenfeld, Nicole A. Diller and Brian T. Ortelere of Morgan, Lewis & Bockius LLP in Philadelphia and San Francisco, and Michael Paul Monaco of Song Mondress PLLC in Seattle.
The federal government was represented as an amicus curiae by Teresa E. McLaughlin of the Department of Justice in Washington.
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