D.C. Circuit: No Relief for Participant In Underfunded Cash Balance Plan


An attorney challenging the amount of benefits she received from her former law firm's underfunded cash balance plan failed to convince the U.S. Court of Appeals for the D.C. Circuit that a district court erred in rejecting her claims of fiduciary breach and violations of the tax code (Clark v. Feder Semo & Bard, P.C.,D.C. Cir., No. 12-7092, 1/7/14).         

Judge Thomas B. Griffith's Jan. 7 opinion rejected the attorney's claim that plan fiduciaries breached their duties by relying on the advice of counsel with respect to plan participants' benefit levels. Griffith wrote that the D.C. Circuit joined the Fifth, Sixth, Eighth and Ninth circuits in holding that the Employee Retirement Income Security Act allows fiduciaries to rely on the advice of legal counsel in “appropriate circumstances.”          

Griffith also rejected the attorney's claim that the plan's post-termination distributions violated tax code Section 401(a)(4)'s prohibition on payments to highly compensated employees. Griffith explained that ERISA doesn't provide a cause of action for violations of tax code Section 401(a)(4).         

“We are very pleased with the court's thoughtful decision, which recognized—as did the district court below—that our clients acted in accordance with ERISA,” Jason H. Ehrenberg, an attorney with Bailey &  Ehrenberg PLLC in Washington and counsel for the defendant law firm, told Bloomberg BNA Jan. 7.         

“The court's decision provides useful insight as to the circumstances under which an ERISA fiduciary may follow the advice of counsel,” Ehrenberg said.         

Counsel for the plaintiff didn't respond to Bloomberg BNA's request for comments.         

Litigation History          

Denise M. Clark worked as an employee benefits attorney at Feder Semo & Bard P.C. for about 10 years, leaving the law firm in 2002. While there, Clark participated in the firm's cash balance plan. When the plan was terminated in 2005, Feder Semo gave Clark the option of receiving her benefits as a straight life annuity commencing at her normal retirement date or as a lump-sum distribution. Feder Semo determined that, although the actuarial equivalent of Clark's annuity was as much as $312,381, she would receive only $166,542 because the plan had insufficient assets to pay all claims.         

The U.S. District Court for the District of Columbia first considered Clark's claims in 2007, when it determined that she couldn't pursue a fiduciary breach claim under ERISA Section 502(a)(3) while simultaneously pursuing a claim for benefits under  ERISA Section 502(a)(1)(B). The district court later rejected Clark's claims against the plan's legal counsel, finding that they were not ERISA fiduciaries.         

In March 2010, the district court ruled for Feder Semo on claims that Clark's reduced benefits violated ERISA's anti-cutback rule; however, it revived Clark's anti-cutback claims in September 2010. One year later, the district court ruled that Feder Semo didn't violate the anti-cutback rule by making proportional reductions in participants' benefits.         

In August 2012, the district court ruled that Feder Semo and its senior attorneys, Howard Bard and Joseph Semo, didn't violate their fiduciary duties by classifying Clark as an employee entitled to a lower level of retirement benefits. It also rejected Clark's claims that Feder Semo committed breach by using unreasonable actuarial assumptions and that it provided participants with an incomplete summary plan description.         

Clark appealed.         

No Tax Code Violation          

The D.C. Circuit began by saying that it affirmed the district court's “judgment and reasoning.” It then went on to address two issues it said “merit further discussion.”         

First, the D.C. Circuit addressed Clark's argument that the plan's payment of $229,949 to firm founder Gerald Feder violated tax code Section 401(a)(4), which limits a plan's ability to make payments that favor highly compensated employees. The D.C. Circuit agreed with the district court's conclusion that ERISA provides no cause of action for a violation of Section 401(a)(4), but it said that neither the district court nor any of the decisions cited by the district court addressed the “particular statutory argument” Clark advanced.         

Specifically, Clark argued that her claim was authorized by ERISA Section 4044, which provides general rules for the allocation of assets after a plan termination. Clark relied on a provision in that section that authorizes the treasury secretary to intervene and override the application of those general rules if they would violate the tax code's rules on payments to highly compensated employees.         

However, the D.C. Circuit said that “Clark never tells us how authority for the Secretary to intervene becomes the source of a duty for a plan fiduciary.” Further, Clark couldn't make such an argument, the court said, because tax code Section 401(a)(4) imposes no limits on plan fiduciaries' ability to authorize distributions upon plan termination.         

Moreover, the D.C. Circuit said, the terms of ERISA Section 4044 only apply “‘[i]f the Secretary of the Treasury determines that' applying its allocation rules unfairly favors the highly compensated.” Clark argued that the secretary made that determination when it issued a regulation requiring retirement plans to comply with tax code Section 401(a)(4), but the D.C. Circuit disagreed, saying “surely this is not the type of particularized determination contemplated by” ERISA Section 4044.

 Excerpted from a story that ran in Pension & Benefits Daily (1/27/2014).