Court Asks SG's Views on ERISA Retirement Accumulation Case

Not a slow day. Already one Supreme Court decision in a public employment case, another one in a qui tam case, a grant of cert. in a Title IX sex harassment case, and now an invitation brief to the SG in the form of AK Steel Corp. v. West, 07-663, which involves the permissibility of a lump sum payment under a cash balance pension plan and the nature of equitable relief under ERISA.

The case concerns (from the district court opinion):

The AK Steel Plan is a cash balance plan, a hybrid of a traditional defined benefits plan and a traditional defined contribution plan. Under a cash balance plan, an employee has a hypothetical account balance which periodically increases by a specified percentage of the employee's salary ("a compensation credit") plus an interest credit. When an employee reaches the normal age of retirement (usually age 65), his or her pension benefit is the value of the hypothetical account balance in the form of a single life annuity and/or a lump sum disbursement.

The issue in this case is the manner in which a participant's benefit is calculated in the event his or her participation in the AK Steel Plan is terminated prior to reaching normal retirement age. Under the AK Steel Plan, such a participant may elect to receive his or net pension benefit in the form of an immediate lump sum disbursement. The amount of the lump sum disbursement is equal to the amount of a participants's hypothetical account balance.

Plaintiffs have brought the current action alleging than the manner in which their lump sum disbursements were calculated under the AK Steel Plan violated ERISA and the I.R.C.

This is not the normal age discrimination issue we look at when analyzing cash balance plans, but asks whether it is consistent with ERISA and the IRC to pay a lump sum distribution and if so, how should that lump sum be calculated in the cash balance setting. On appeal, a number of other issues were also decided (from Westlaw summary):

Early retirees who elected to receive their pension benefits under steel corporation retirement accumulation pension plan in form of lump-sum payment brought class action lawsuit alleging that plan's failure to use “whipsaw calculation” when determining value of their lump-sum distributions caused a forfeiture of benefits in violation of Employee Retirement Income Security Act (ERISA). The United States District Court for the Southern District of Ohio, Sandra S. Beckwith, Chief Judge, granted partial summary judgment in favor of retirees on issue of liability and, 2005 WL 3465637, awarded retirees over $37 million in damages and more than $9 million in prejudgment interest. Defendants appealed.

Holdings: The Court of Appeals, Ronald Lee Gilman, Circuit Judge, held that:
(1) court did not have jurisdiction to grant equitable relief;
(2) retiree did not have to concede that he received all benefits due under terms of plan in order to argue he came within futility exception to ERISA's exhaustion requirement;
(3) subsection of ERISA civil enforcement provision permitting action to recover benefits provided the appropriate remedy;
(4) each retiree was entitled to have their lump-sum distribution reevaluated using the whipsaw calculation as determined by district court, plus interest;
(5) use of preretirement mortality discount was properly rejected; and
(6) Pension Protection Act (PPA) would not be retroactively applied.

Affirmed.

On the cash balance issue, the Sixth Circuit found that each retiree was entitled to have their lump-sum distribution reevaluated using the “whipsaw calculation” as determined by the district court, plus interest because the plan provided that whenever a participant elected lump-sum distribution, the benefit received would be equal to balance of participant's hypothetical account and because the interest credit rate specified in the plan was higher than statutory discount rate. 

Additionally, the Court may again consider the bounds of equitable relief under ERISA because the court also held that plaintiffs did not assert a proper equitable claim where in the portion of their complaint requesting costs and attorney fees because they only requested unspecified “other relief as may be deemed just and equitable,” because participants had already cashed out of their participation in plan, and traditional forms of equitable relief such as injunction, mandamus and restitution would not redress their claim, which was essentially one for money damages for alleged underpayment of benefit.  The second reason deal with plan standing seems to be overruled by LaRue.  But potentially this case could be a landmark ERISA decision because it could clear up not only the cash balance/lump sum question, but also further define the nature of equitable relief under ERISA. 

PS