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ERISA authorized reformation of retirement plan to bring it in compliance with the Act

By Ronald Miller, J.D.

Where the written terms of a pension plan indisputably violated ERISA, reformation of the plan was available under ERISA § 502(a)(3), and the district court was authorized to enforce the reformed plan as a second step under Section 502(a)(1)(B).

A federal district court erred in granting a pension plan’s motion to dismiss an ERISA claim filed by employees on the basis that it was not authorized to recalculate benefits because the plan’s definition of “normal retirement age” violated ERISA as it bore no plausible relation to “normal retirement,” ruled the Second Circuit. The plan had argued that ERISA did not authorize the relief sought by the employees—reformation of the plan to bring it into compliance with ERISA and the recalculation of benefits in accordance to the reformed plan. However, the appeals court concluded that ERISA did in fact authorize the relief sought. Consequently, it vacated the judgment of the district court and remanded for further proceedings (Laurent v. PriceWaterhouseCoopers, LLP, December 23, 2019, Chin, D.).

Whipsaw calculation. In 1996, the Internal Revenue Service announced its position that where a cash balance plan permits participants to take benefits before normal retirement age (NRA) in the form of a lump sum and promises future credits, the plan must: (1) project the participant’s account out to the participant’s NRA and add an amount reflecting the value of the future interest credits that would have accrued had the account balance remained in the plan until that future date; and (2) discount that projected total back to the distribution date using the plan’s discount rate, as limited by a statutory maximum. This calculation is known as the whipsaw calculation.

The plan provided that when a vested employee leaves employment, she has the option of receiving (1) an annuity commencing at NRA or (2) an immediate lump sum. If a plan offers participants a lump-sum distribution, it “cannot deprive the participants of the value that would accrue if the participants waited and took their distributions as an annuity at normal retirement age.” The whipsaw calculation is used to determine the difference between the “value of a cash balance plan account at any given time and the value of the account as an annuity payable at [NRA].”

Normal retirement age. Employees of PriceWaterhouseCoopers brought this action in 2006 alleging that their retirement plan violated ERISA. In a series of decisions, three different district judges held that the plan violated ERISA. In 2015, on an interlocutory appeal by the employer, the Second Circuit agreed, holding that “the [P]lan’s definition of ‘normal retirement age’ as five years of service violates [ERISA] because it bears no plausible relation to ‘normal retirement.’” Because the district court had not addressed “the appropriate relief,” the matter was remanded for consideration of that question.

However, on remand, the employer moved for judgment on the pleadings, arguing that ERISA did not authorize the relief sought by the employees—reformation of the plan to bring it into compliance with ERISA and the recalculation of benefits in accordance with the reformed plan. The district court agreed, holding that ERISA did not authorize the recalculation of benefits in the circumstances here and dismissed the complaint with prejudice, notwithstanding the violation of ERISA.

Availability of reformation. On appeal, the employees argued that ERISA authorized a two-step procedure to remedy the plan’s violation: (1) an order compelling the employer to bring the terms of the plan into compliance with ERISA (authorized under Section 502(a)(3)), and (2) an order requiring the plan to re-calculate benefits accrued and/or due under the plan in accordance with the requirements of ERISA (authorized under Section 502(a)(1)(B)).

As an initial matter, the Second Circuit noted that it had yet to consider the availability of reformation to plaintiffs in circumstances such as these, where the written terms of a pension plan indisputably violate ERISA, but there is no allegation that the violation stems from traditional fraud, mistake, or otherwise inequitable conduct. Still, the appeals court concluded that reformation of the plan was available under ERISA Section 502(a)(3), and that the district court was authorized to enforce the reformed plan as a second step under Section 502(a)(1)(B).

By its plain language, Section 502(a)(3) authorizes participants and beneficiaries to “obtain equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” Because reformation is an equitable remedy and the plan violated a provision of the subchapter, the appeals court concluded that Section 502(a)(3) authorized the district court to reform the plan.

Enforcement. After concluding that reformation of the plan was available under Section 502(a)(3), the appeals court had little trouble holding that the district court had authority to grant the employees’ proposed remedy—enforcement of the reformed plan under Section 502(a)(1)(B). In the absence of controlling authority otherwise, the appeals court was inclined to follow the Supreme Court’s express preference that violations of ERISA should be remedied. Accordingly, the judgment of the district court was vacated and the case remanded for further proceedings.