plaintiffs' benefits accrued under the Plan. The Court finds no such exception available to the defendants here.
B. The Remaining Contentions
The defendants argue that the Auwarters did not give written notice of election to the Plan Pension Committee any time before March 13, 1990. Having reviewed the correspondence and motion papers, the Court finds no merit to this argument.
In addition, the defendants rely on the Section 7.1 Plan language which states that prior to the participant's benefits commencement date, he may by written notice to the Committee and "subject to approval by said Committee," elect to convert his vested benefit from the normal annuity form to an optional lump sum benefit. On this topic of Committee discretion, the Court finds significant the February 8, 1991 letter of Joyce E. Floyd, Chief of Employee Plans Rulings Branch of the IRS, to Christopher Smith of M & M, the initial actuarial consultants for the Plan. Floyd indicates that her letter is in response to Smith's request for general information relating to section 411(d)(6) of the IRC. Although this communication is not a letter ruling, the Court finds the following information nonetheless persuasive:
"Regulations under section 401(a)(4) of the Code were also issued on July 11, 1988. Section 1.401(a)-4 of the regulations, Question and Answer-4, provides generally that although a plan may mandate a single sum distribution to participants with benefits whose present value do not exceed $ 3500, such single sum distributions are not excepted from the limits of employer discretion contained in section 411(d)(6) of the Code.
Section 1.411(d)-4 of the regulations, Question and Answer-4(a), provides generally that a plan which permits an employer, either directly or indirectly, through the exercise of discretion, to deny a participant a section 411(d)(6) protected benefit provided under the plan for which the participant is otherwise eligible violates the requirements of section 411(d)(6). . . .
Section 1.411(d)-4 of the regulations, Question and Answer-8(b), provides, generally, that a plan which conditions the availability of an optional form of benefit on employer discretion must be amended . . .
Question and Answer-8(d) provides generally that the alternatives provided in (b) are only permissable [sic] until the applicable effective date of the plan. . . After the applicable effective date . . . any amendment . . . that eliminates or reduces a section 411(d)(6) benefit or imposes new objective conditions on the availability of such benefit will fail to qualify for the relief provided under 8(b) (emphasis supplied).
The defendant argues that the right to receive a lump sum benefit was conditioned upon the discretion of the Committee. The Court finds that the above information demonstrates that there are limits to such discretion, and the policy clearly disfavors a plan which conditions the availability of an optional form of benefit on employer discretion.
As to the defendants' claim that the funding would be depleted for other participants in the Plan if the plaintiffs were permitted to take a lump sum benefit, the Court finds such argument to be without merit. There are only nine participants in the DPSC Plan and only the plaintiffs are near retirement age. The Treasury Regulations and Internal Revenue Code provisions relied upon by the defendants in this regard are designed to prevent discrimination with respect to benefits provided under the plan. In the instant case, there is no discrimination since the lump sum benefit is available to all participants and the value of the benefit is determined using the same actuarial assumptions for all plan participants.
According to the defendants, § 8.3 of the DPSC Plan has always prohibited lump sum payments to "highly compensated employees during the first ten years after the 'effective date' of the plan." The defendants also rely upon IRC § 401(a)(4) and its accompanying regulations which restrict the amount paid each year to any highly compensated employee under a pension plan. The Court finds such reliance misplaced. These regulations apply only to plan amendments made in favor of highly compensated employees. There is no issue of an amendment in this case, but rather the benefit entitlement under the original plan provisions. There have been no amendments to the Plan which favor the plaintiffs. The court further finds that IRC § 401(a)(4) relates specifically to income tax provisions and not to ERISA benefit claims (see Reklau v. Merchants National Corp., 808 F.2d 628, 631 [7th Cir. 1986]).
Ultimately, the cited regulations and Plan provisions apply only if the Plan is terminated within the first ten years after its establishment. The Court finds that the effective date of the DPSC Plan was October 1, 1980. Section 8.3 of the Plan provides as follows:
"8.3 10-Year Benefit Restriction. Notwithstanding any contrary Plan provision, in the event that, during the first 10 years after the Effective Date or the date the plan is amended in a manner substantially increasing benefits for highly compensated Participants (a "Restriction Date"), the Plan is terminated, the full current costs of the Plan are not met or the Employer's contributions are permanently discontinued, the Employer contributions or funds attributable thereto . . . shall be subject to the conditions set forth in this Section 8.3."
In light of the fact that the Plan has been in existence for more than ten years, the Court finds that this is another reason why the regulations are not applicable.
Having reviewed all of the arguments made by the plaintiffs and defendants, the Court finds that the defendants are in violation of the DPSC Plan regarding the optional lump sum benefit and in violation of ERISA § 204(g), 29 U.S.C. § 1054(g) which prohibits the retroactive reduction of benefits accrued by participants in a retirement plan. Therefore, the Court grants the plaintiffs' motion for partial summary judgment on the first cause of action and its cross-motion for partial summary judgment on the second cause of action.
II. The Defendants Obligations as Fiduciaries
According to the defendants, a fiduciary's duties under ERISA run to all participants in the Plan and allowing lump sum payments to the plaintiffs would have been devastating to the long-term interests of the Plan. The Court reminds the defendants that "all participants in the plan" encompasses a duty to the Auwarters as well.
The defendants also argue that the Plan's funding was based on the assumption that benefits would be paid in annuity form. Although the Court accepts the fact that many pension plans are operated under such a premise, the instant plan also provides for an optional lump sum benefit. The Court finds that if the Plan pay-out was actually designed as a yearly annuity, then the provision for an optional benefits pay-out scheme should never have been incorporated in the Plan provisions. By including a lump sum option, the authors of the Plan had a collateral responsibility ab initio to insure the Plan's funding.
Section 7.1 of the Plan makes benefits available to participants in a lump sum form regardless of the method used to fund the Plan. Contradictions in Plan terms or in ERISA regulations violates a fiduciary's duty to its plan participants to operate the Plan in accordance with the statute and Plan terms (see ERISA § 404[a][D]). Despite the insufficiency in Plan assets which may arise due to erroneous funding assumptions, ERISA does not permit a benefit cut-back in such circumstances. In fact, ERISA specifically prohibits such cut-backs and requires the fiduciary to provide the benefits promised in the Plan (ERISA § 204[g]). Furthermore, there is no limitation in the Plan Stating that a benefit entitlement is subject to the Plan being adequately funded.
In light of the foregoing, the defendants' motion for partial summary judgment on the fourth cause of action is denied.
Based upon the foregoing, the court concludes that there are no triable issues of fact with regard to the first, second and fourth causes of action. The Court therefore makes the following determinations:
(1) the motion by the plaintiffs for partial summary judgment on the first cause of action under the DPSC Defined Benefit Pension Plan is granted and the defendants' cross-motion for partial summary judgment is denied;
(2) the defendants' motion for partial summary judgment on the second cause of action under ERISA § 204(g), 29 U.S.C. § 1054(g), is denied and the plaintiffs' cross-motion for partial summary judgment is granted;
(3) the defendants' motion for partial summary judgment on the fourth cause of action related to the defendants' fiduciary duty to the Plan is denied.
In light of the fact that neither party has addressed the third cause of action, namely, the Auwarters' claim against DPSC for failure to provide them within 30 days of their request the values and calculations of lump sum benefits under the terms of the Plan prior to any modification by the Board, this case is hereby set down for a conference on October 19, 1992 at 9 a.m., in Courtroom A of the Uniondale Courthouse, to address the remaining issues related to the third and fourth causes of action.
Dated: Uniondale, New York
September 30, 1992
ARTHUR D. SPATT
United States District Judge
© 1992-2004 VersusLaw Inc.