used in the calculation. Under many pension plans, employees accrue benefits at a percentage of their average monthly pay. The percentage is considered the "rate"; the average monthly pay constitutes the "base."
The regulation provides that the 133 1/3% Rule is not satisfied "if the base for the computation of retirement benefits changes solely by reason of an increase in the number of years of participation." 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F). Thus, a pension plan may not change the base in the accrual formula--e.g. from average monthly pay to highest monthly pay--solely because a participant has worked more years than other participants. Id.
The Plan in section 302(a) makes the following provisions pertinent here for a participant's benefit accrual. For the first 24 years of service after March 31, 1976, a participant's pension benefit accrues at 2% of Average Monthly Earnings, that is, a participant's career average pay (Average Earnings). Participants who work for 25 years without a break in service longer than two years, will, in their 25th year, have their pension benefit recalculated for all previous years of service at 2% of Final Average Monthly Earnings (Final Average Earnings) Final Average Earnings is the average pay based not on the career average pay but on a participants' highest five years of earnings in the ten years prior to retirement (Final Average Earnings). For each year of employment after such a participant's 25th year, the benefit accrues at 1.66% of Final Average Earnings.
In contrast, participants who have worked less than 25 years or have had a break in service for longer than two years will have all their post-Act employment credited at only 2% of Average Earnings, that is, career average pay.
Carollo says the Plan violates the Act's minimum accrual rates for post-Act service for two reasons. First, it fails to satisfy the 133 1/3% Rule because the increase between year 24 and year 25 is greater than 33 1/3% and this increase results from the Plan's use of a higher base, Final Average Earnings rather than Average Earnings. Second, the Plan unlawfully disregards a participant's years of employment prior to a two year break in service.
A. The Plan's change in base
Carollo says that the Plan violates the Act because it changes the base "solely" by reason of a participant's increased service in violation of the regulation, 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F).
Defendants say that the Plan's rate of accrual remains constant at 2% through a participant's 25th year and then actually decreases to 1.66% for subsequent years of employment. Although they admit that the base used does change in a participant's 25th year of service (from Average Earnings to Final Average Earnings), they say that change is not "solely" because of an increase in the number of years of service, but is also conditioned on: (1) at least one year of service after December 1, 1980 and (2) no break in service longer than two years.
Plainly section 302(a) of the Plan operates so that few employees will have their pension benefit recalculated using the higher base. For many, this will be only because they have not participated in the Plan as long as others. It would make no sense to interpret "solely" in the regulations, 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F), in such a way as to defeat the purpose of the Act to prevent backloading. But neither can the term be ignored.
The word "solely" can be reconciled with the purpose of the Act by reading it to mean that while the base may be changed because of factors such as salary increases, the base may not be changed, absent such factors, by reference to length of service. Salary increases, often linked with longer service, can increase the amount of benefit by raising the base. Patently, nothing in the Act sought to limit the effect that wage increases would have on the base in the computation for retirement benefits.
Indeed, the Act's legislative history shows that Congress wished to insure that fluctuations in a formula's accrual rate resulting from externalities to the Plan--i.e. salary differentials and changes in the social security wage base--would not violate the 133 1/3% Rule:
In applying the 133 1/3% test, social security benefit levels for future years and other factors relevant in computing benefits, including salary differentials, are to be held constant. With respect to compensation related fluctuations in rates of accrual or, in an appropriate case, fluctuations on account of differing rates of contribution, it is the intention that such fluctuations be disregarded for purposes of applying the 133 1/3 % test. Such matter, of course, will be subject to regulations of the Secretary of the Treasury which will insure that the application of these principles are consistent with the purposes of the 133 1/3 % limitation.
120 Cong. Rec. 515737 (daily ed. Aug. 22, 1974) (statement of Sen. Williams), reprinted in 1974 U.S.C.C.A.N. 4639, 5180.
The regulation was drafted to reflect Congress' concern and distinguish between permissible and impermissible changes in the base. Although an employer may, of course, raise salaries after 25 years of service and thereby change the base, it may not change the base because of length of service.
But the Plan does exactly that. It raises the base in the 25th year of service, restricts that raise to the few who have had no break in service longer than two years and at least one year of service after 1980, and gives those favored few a bonanza by making the raise retroactive over their whole careers.
The Plan fails to satisfy the Act's minimum accrual rates.
B. The Plan's break in service provision Carollo says the Plan is also invalid because participants with a break in service longer than two years have a different retirement benefit than those without such a break.
The Act and its regulations require that a participant's retirement benefit equal the "normal" benefit a participant would receive at retirement. See 29 U.S.C. § 204(b)(1)(B), 29 C.F.R. § 1.411(b)-1(b)(2)(A). Normal retirement benefit is defined as "the greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age." 29 U.S.C. § 1002(22). "Normal retirement age" is the earlier of the retirement age under the Plan, or age 65 (so long as the participant's fifth anniversary of participation in the Plan is before he or she turns 65). 29 U.S.C. § 1002(24).
The Plan makes it impossible to determine what a participant's retirement benefit will be and how much of it has accrued. The Plan has two retirement benefits--one based on Final Average Earnings for participants with unbroken service and one based only on Average Earnings for participants with broken service. Participants cannot measure the rate at which their pension accrues because that rate depends on whether they will have a break in service before completing 25 years of qualified employment.
Moreover, a two year break in service is not a legitimate basis to disregard a participant's service prior to the break. For purposes of determining when a participant's benefit has vested, a Plan may only disregard service preceding breaks five years or longer or breaks exceeding the participant's length of service prior to that break. 29 U.S.C. § 1053(b)(3)(D)(i). The regulations make this section applicable to a Plan's benefit accrual formula. 29 C.F.R. § 2530.204-1(b)(1).
The Plan does not count service prior to any break longer than two years for purposes of determining the 25-year period marking the point when a participant's pension benefit is recalculated using the higher base. For this purpose, the plan disregards this prior service no matter how long a participant worked prior to the break, and despite the fact that the break is less than five years.
Defendants suggest that this issue was litigated and resolved by the district court in Meagher v. Cement and Concrete Workers District Council Pension Fund and Welfare Fund, 1992 U.S. Dist. LEXIS 3742, 1992 WL 75128 (S.D.N.Y. 1992) (Meagher I), and Meagher v. Board of Trustees of the Pension Plan of the Cement and Concrete Workers District Pension Fund, 921 F. Supp. 161 (S.D.N.Y. 1995) (Meagher II), aff'd, 79 F.3d 256 (2d Cir. 1996). But the Meagher litigation, while involving the same plaintiff's counsel, did not address the question presented here. In Meagher I, plaintiff claimed that the two year break in service provision was arbitrary and capricious as applied to him because: (1) it did not distinguish between voluntary and involuntary breaks in service, and (2) the Fund regularly excused breaks due to disability or compulsory military service. The plaintiff did not claim, as does Carollo, that the break in service provision itself violates the Act.
The Meagher plaintiff did bring that claim in a later action. But at that point Judge Lowe held that the new claims were barred by res judicata because the parties in both actions were identical and, even though the same legal theory was not raised, the factual predicate underlying the earlier and the later claims was substantially the same. Meagher II, 921 F. Supp. at 167-68.
The parties here have not litigated previously the questions now at issue, and nothing in the holdings of Meagher I or Meagher II binds this court. The Plan's variable rate of accrual conditioned on a temporary break in service violates the Act.
The court will grant summary judgment to Carollo on his first claim for relief.
Carollo's Second Claim alleges that the Plan violates the Act's minimum pension accrual rates for pre-Act service. He makes several distinct arguments.
He says that the Plan's amount of pre-Act accrual fails to satisfy the Act's requirements. Under 29 U.S.C. § 1054(b)(1)(D), the Act's three backloading tests, referred to above on page five, do not apply to pre-Act service so long as the accrued benefit is not less than one-half of the benefit that would have accrued had one of the Act's minimum accrual rates applied.
Carollo says that his pre-Act accrued benefits do not amount to one-half what would have accrued had the 133 1/3% rule been in effect. But the regulations permit use of any of the Act's three minimum accrual standards--either the 3% Rule, the 133 1/3% rule or the Fractional Rule--to determine whether the pre-Act accrued benefit is sufficient. See 26 C.F.R. § 1.411(b)-1(c)(2)(i). Because the parties agree that Carollo's pre-Act accrued benefit is at least one-half what would have accrued under the Fractional Rule, the regulations are satisfied.
Carollo says that the Plan nevertheless violates the Act with respect to pre-Act accrued benefits because it fails to establish a "catch-up" provision to compensate plan participants for the difference between the amount actually accrued pre-Act and what would have accrued had one of the three tests applied. He says the regulations require that any difference between the two amounts must be compensated for in the later years of the plan. 26 C.F.R. § 1.411(b)-1(c)(2)(v).
But Carollo has not presented facts to demonstrate that the Plan fails to comply with this regulation and the court is unable to conclude upon the current record that summary judgment on this point is warranted.
Finally, Carollo suggests that the Plan violates the Act because it does not apply the same standard to determine the sufficiency of pre-Act accrual amounts to all participants on a consistent basis. Carollo says that if the Plan applies the fractional rule to test the sufficiency of accrued benefits for participants who have not had their pension recalculated, the Plan must also apply the fractional rule to those who have had their pension recalculated. In support of his argument he quotes from the Act's legislative history:
The plan may choose which of the 3 standards it wishes to apply for the past (subject to the antidiscrimination rules); however, the same standard must be applied to all the plan's participants.
H.R. Rep. No. 93-1280 (1974), reprinted in 1974 U.S.C.C.A.N. 4639, 5057.
But this statement suggests only that the sufficiency of the pre-Act accrued benefits for all participants should be measured by the same backloading test--i.e. that participants' pre-Act accrued benefits should be one-half of the benefits that would have accrued had one of the backloading tests applied. Carollo has not presented any evidence that the Plan's pre-Act accrued benefits for all participants cannot satisfy the same backloading test, nor has he referred to any regulation which makes this an explicit requirement of the Act.
Because there are disputed issues of fact as to whether the Plan complies with the Act's minimum accrual rates for pre-Act service, summary judgment on Carollo's second claim for relief is inappropriate.
Defendants say the doctrine of primary jurisdiction requires the court to stay this action pending the Service's review of the Plan for tax purposes.
In May 1994, Carollo's counsel, representing other participants, filed a complaint with the Service claiming that the Plan's pension accrual rate did not comply with the Act.
In August 1994, the Service notified the Board that it was commencing an audit of the Plan. In March 1995, the Board submitted the Plan to the Service with an application for a favorable determination letter. A week later, the local Service office told the Board that it was requesting technical advice from the National Office and suggested that the Board submit its comments to the Service's proposed statement of facts and questions. Eventually, in mid-July 1996, the Service's local office sent its request for technical advice to the National Office. The Plan's application for a determination letter is still pending.
The doctrine of primary jurisdiction allows a federal court to stay an action to give the parties a chance to seek an administrative ruling if the matter extends "beyond the 'conventional experiences of judges' or 'fall[s] within the realm of administrative discretion.'" National Comm. Ass'n v. American Tel. & Tel., 46 F.3d 220, 223 (2d Cir. 1995). See also Reiter v. Cooper, 507 U.S. 258, 268, 113 S. Ct. 1213, 1220, 122 L. Ed. 2d 604 (1993). The doctrine is applicable so long as Congress intended the matter to be within the agency's authority, an intent which may be evinced from the overall statutory scheme.
Because the tax code grants favorable status to qualifying plans, that does not mean there is an administrative scheme for resolution of the present dispute. Nothing in the Act mandates qualification of a pension plan for tax purposes, see Hollingshead v. Burford Equipment Co., 747 F. Supp. 1421, 1436 (M.D. Ala. 1980), and a plaintiff need exhaust only those remedies provided by the Plan before filing suit under the Act. See Drinkwater v. Metropolitan Life Ins. Co., 846 F.2d 821, 825 (1st Cir. 1988) (claim for benefits must first be presented to the named fiduciary for review).
Plan participants have no opportunity to be heard in an application for a favorable determination letter from the Service, and a determination by the Service, while entitled to deference, is not binding on the court. The Service has no authority to bring actions on behalf of participants; nor can it enforce in court even those parts of the Act that concern its regulatory authority. Congress recognized the Service's limited enforcement capabilities when it introduced the Act:
The Internal Revenue Code provides only limited safeguards for the security of anticipated benefit rights in private plans since its primary functions are designed to produce revenue and to prevent evasion of tax obligations. The essence of enforcement under the Code lies in the power of the Internal Revenue Service to grant or disallow qualified status to a pension plan, thus determining the availability of statutory tax advantages.
H.R. Rep. No. 93-533, reprinted in 1974 U.S.C.C.A.N. 4639, 4642. See also 29 U.S.C. § 1132.
Moreover, while adjudication of this case does involve matters of some complexity, the doctrine may not be invoked merely because of the case's difficulty. Primary jurisdiction is appropriate when the court is faced with discretionary judgments, such as whether a tariff is "reasonable." See United States v. Western Pacific R.R. Co., 352 U.S. 59, 77 S. Ct. 161, 1 L. Ed. 2d 126 (1956).
Here there is no room for administrative discretion. The Act and the regulations under it establish minimum accrual rates for pension benefits. Whether the Plan's provisions satisfy these minimums is a legal issue, "involving neither the agency's particular expertise or its fact finding process." Environmental Defense Fund v. Wheelabrator Tech., 725 F. Supp. 758, 775 (S.D.N.Y. 1989).
To stay the current action on the grounds of primary jurisdiction would undo the remedial goals of the Act and delay participants' right to sue in federal court. The motion for a stay will be denied.
Defendants say that summary judgment is warranted because the action is untimely.
While the Act establishes a limitations period for claims alleging a breach of fiduciary duty, see 29 U.S.C. § 1113, no express limitations provisions exist for other types of claims, such as those alleging the Plan violates the Act. Thus, to determine whether Carollo's claims are time-barred, the court analyzes separately his claims alleging a breach of fiduciary duties and those alleging that Plan provisions violate the Act.
A. Breach of fiduciary duty claims
Three claims pleaded in the complaint--Claims Four, Six and Eleven--allege that the Trustees breached their fiduciary duties under the Act.
Section 1104 of the Act sets out the duties owed by fiduciaries to Plan participants. Fiduciaries, such as the Board members, are to discharge their duties solely in the interest of the participants and for the exclusive purpose of providing benefits to participants and to do so "in accordance with the documents and instruments governing the plan . . ." 29 U.S.C. § 1104(a)(1). Plan fiduciaries also have "prudent investor" duties. They are obligated to use the care and diligence of "a prudent man acting in a like capacity[,]" and to diversify Plan investments so as "to minimize the risk of large losses[.]" 29 U.S.C. § 1104(a)(1)(B) & (C)
A participant may bring a claim for breach of fiduciary duty on behalf of the Plan under 29 U.S.C. § 1132(a)(2), which authorizes "appropriate relief under section 1109 of this title[.]" See Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 105 S. Ct. 3085, 87 L. Ed. 2d 96 (1985). Section 1109 in turn provides that fiduciaries who breach their obligations "shall be personally liable to make good to such plan" any losses resulting from the breach, "and shall be subject to such other equitable or remedial relief as the court may deem appropriate." 29 U.S.C. § 1109(a).
Breach of fiduciary actions not on behalf of the Plan but on behalf of an individual may be brought under the Act's "catch-all" provision, 29 U.S.C. § 1132(a)(3). Varity Corp. v. Howe, 516 U.S. 489, 134 L. Ed. 2d 130, 116 S. Ct. 1065, 1077-78 (1996). That section authorizes a civil action by, among others, a participant to "enjoin any act or practice which violates any provision" of the Act, or to "obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan[.]" 29 U.S.C. § 1132(a)(3).
The statute of limitations applicable to actions for breach of fiduciary duties is either six years after the date of the last action constituting part of the breach or three years after plaintiff had actual knowledge of the breach, whichever is earlier. The Act spells out these provisions in 29 U.S.C. § 1113, which states in pertinent part:
(a) No action may be commenced under [the subchapter entitled Protection of Employee Benefit Rights] with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part or with respect to a violation of this part, after the earlier of--