Benefits & ERISA Law

Decision in Cash Balance Conversion Case May Have Missed the Boat

By Suzanne Wynn

The 1st Circuit Court of Appeals has delivered a very interesting opinion involving a grab bag of cash balance conversion issues. In Gillis v. SPX Corp. Individual Acct Retirement Plan, No. 07-1777 (Dec. 19, 2007), the 1st Circuit affirmed the district court’s granting of summary judgment in favor of the plan sponsor, stating that they found neither of the participant’s arguments persuasive.

In 1998, SPX sponsored two cash balance plans when it acquired the General Signal Corporation, who sponsored a traditional defined benefit plan. Participant Gillis was a participant in the General Signal Corporation’s traditional defined benefit plan. As part of the acquisition, SPX converted the value of the Participant’s already-accrued benefits in the General Signal Corporation’s traditional defined benefit plan into an opening account balance for the cash balance plans.

After the acquisition, SPX created a third cash balance plan. This cash balance plan was designed to provide benefits to employees who, as of January 1, 1999, were at least 45 years old and who had completed at least 5 years of continuous service with the company. The Court stated the reason behind the creation of this plan was to prevent the possibility of a cutback in benefits for employees who had been working toward the early retirement benefit in the General Signal Corporation (GSX) plan but who had not met the age 55 and 5 years of service requirement for the early retirement benefit at the time of the merger.

The Court states that “under its pension plan, SPX guaranteed that: (1) an employee’s already accrued benefit under the previous GSX pension plan would not be reduced; and (2) upon retirement, the plan administrator would calculate an employee’s potential benefit under each of the three SPX plan options, and grant the employee the highest of the three payment amounts.” The Court does not state where this guarantee was stated or how it was provided to participants.

Participant qualified for the early retirement benefit in the General Signal Corporation traditional defined benefit plan before the acquisition by SPX. In 2002, at age 59, the Participant elected to retire early. The plan administrator calculated the Participant’s lump sum benefit payout under the 3 different SPX plans, and notified the Participant of his payout under the SPX Accrued Benefit plan, which is the plan with the highest payment amount. The Participant challenged the decision by the plan administator on which plan provided for the greatest payment amount, and both sides filed for summary judgment with the district court.

The district court granted summary judgment in favor of the plan sponsor. The 1st Circuit affirmed the district court’s decision, applying a de novo standard of review which means the Court will only reverse the district court’s decision if they find the plan administrator’s determination was arbitrary, capricious, or an abuse of discretion.

At issue was whether the plan administrator’s calculations properly determined the early retirement benefit subsidy. In determining which of the three plans provided the greatest lump sum benefit, the plan administrator calculated the Participant’s benefit as already including the early retirement benefit subsidy granted by the General Signal Corporation’s traditional defined benefit plan, deciding it was already included in the Participant’s opening account balance in SPX’s plan. The Court stated this decision was proper, as including the early retirement subsidy would have resulted in a double-counting windfall to the Participant.

In the classic cash balance conversion case, the Court addresses whether the participant received the greater of two amounts - the benefit provided by the traditional defined benefit plan and the benefit provided by the cash balance plan. In this case, the 1st Circuit sidesteps that issue in an interesting fashion. After stating that the Court need not decide whether the issue is properly before the court because the issue fails on the merits, the Court decides that the Participant failed to submit credible evidence to the district court “demonstrating that the amount he would have accrued under the previous GSX pension plan, calculated as of the age of 65, was more than the amount he would have accrued under the SPX plan, again assuming a retirement age of 65.” Thus, the ‘greater of’ issue is not addressed by the Court and instead the Court begins their analysis with whether the Participant received the ‘greater of’ one of the hypothetical account balances in the cash balance plans.

Another issue in classic cash balance conversion cases is whether the conversion resulted in impermissible age discrimination. The Court rejects this claim with one sentence, stating that since the Court concluded that the Participant’s benefit was not improperly cutback, it necessarily rejects Participant’s claim that any improper cutback was the result of age discrimination.

Additional analysis:

Stephen D. Rosenberg of the Boston ERISA & Insurance Litigation Blog in The First Circuit on an Administrator’s Discretion in Determining the Amount of Retirement Benefits.

S. Cotus of the Appellate Law & Practice blog in CA1: In an ERISA Case, There Was No Cutbacks of Benefits.
“Gillis v. SPX Corporation, No. 07-1777. Most people spend the entire day at the office talking about ERISA cases around the water cooler. After all, talking about this stuff is how men bond. In some offices, the people that can?t talk ERISA are fired simply because they don?t seem like team players. This is an ERISA pension case that will keep people talking in bars for years to come. It is so exciting that I put it under the fold. If you don?t read about it, you might be considered a ?little weird? by the other guys.”

Technorati Tags: Pension Protection Act, ppa, cash balance, 1st Circuit, Gillis, SPX, GSX, ERISA

Full post as published by Pension Protection Act Blog on January 02, 2008 (boomark / email).