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July 30, 2004.

PAUL J. FROMMERT, et al., Plaintiffs,

The opinion of the court was delivered by: DAVID LARIMER, Chief Judge, District



Although adopted for salutary purposes, pension and other employee benefit plans have spawned much litigation over the years, particularly since the adoption of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1101 et seq., in 1974.*fn1 This case presents one more example. At issue in this case is the pension plan of Xerox Corporation. The plan called the Retirement Income Guarantee Plan ("RIGP" or "Plan") has already been the subject of several prior decisions of this Court*fn2 and other courts.*fn3

  The details of plaintiffs' claims will be spelled out below, but in a nutshell, they contend that the Plan administrator has wrongfully calculated the amounts of plaintiffs' benefits under the Plan. The net result of that calculation is that plaintiffs receive (or will receive, in the case of those plaintiffs who have yet to retire) hundreds, and in some cases even thousands, of dollars less per month than plaintiffs believe they should. Plaintiffs ask the Court to declare that the administrator should calculate their benefits according to plaintiffs' view of the Plan provisions.

  After this Court granted defendants' motion to dismiss, in part, (Frommert v. Conkright, n. 1, supra), plaintiffs filed an amended complaint styled the First Consolidated Amended Complaint joining Levy v. Conkright (01-CV-6447) with this case in one complaint on behalf of roughly 100 present and former employees of Xerox. In that complaint, plaintiffs contend that defendants-the administrators of the Plan-violated various provisions of ERISA in calculating plaintiffs' retirement benefits.

  All the plaintiffs share this common circumstance: they were all former employees of Xerox who left, requested and received lump-sum distributions from the Pension Plan and, years later, were rehired by Xerox, which resulted in their accruing benefits again under the Plan. Some plaintiffs have retired again and object to the benefits calculated by defendants; others, probably the majority, still work at Xerox and seek a declaration now of their rights to benefits in the future.

  The principal matter of contention is whether the administrators properly offset plaintiffs' prior lump-sum distributions, as enhanced, against the retirement benefits accruing as a result of the employees being rehired. Prior distributions become a factor, as an offset, because the Plan directs that all the years of service count in calculating benefits — both years before receiving the lump-sum distribution and years of service once rehired. The offset is calculated by the value of the prior lump-sum distribution plus any sum that the distribution would have earned (hypothetically) had it remained in the fund and been invested. The parties refer to this as the "phantom account" offset. For several reasons, plaintiffs object to this method of calculating benefits and seek a declaration under § 1132(a)(1)(B) that the Administrator erred in calculating benefits using this formula.*fn4

  Xerox has moved for summary judgment dismissing the complaint. Plaintiffs Paul Frommert and Alan Clair have cross-moved for summary judgment, although the declaratory and injunctive relief that they seek would seemingly inure to the benefit of all the plaintiffs. Frommert is typical of those employees who, after joining this action, left Xerox's employ, and who seek additional benefits in accordance with their interpretation of the Plan. Clair is typical of the majority of the plaintiffs in this action, who are still employed by Xerox and seek a declaration clarifying the manner in which their benefits will be calculated in the future.


  I. Relevant Plan Provisions

  An understanding of plaintiffs' claims requires some familiarity with certain Plan provisions, as well as with the Plan's various restatements and amendments over the years. The RIGP was first adopted in 1977. At all times relevant to this action, the Plan has provided that, upon retiring, an employee will receive benefits in an amount equal to the highest result of three alternative calculation methods.

  The first calculation method is the retirement plan formula ("RIGP Formula"), which is a guaranteed annuity calculated by multiplying years of service (up to thirty years) by 1.4 percent of the highest-average yearly pay (defined as the average of the employee's five highest-paying calendar years with Xerox). If an employee retires early, defined as retiring after the age of 55 but before the age of 65, that person's RIGP Formula benefit is reduced by five percent for each year that he receives retirement benefits before reaching the age of 65. For rehired employees, the number of years of service includes the total time the employee worked for Xerox, not just the period of employment following rehire. The second method for calculating retirement benefits under the Plan is based on the employee's Cash Balance Retirement Account ("CBRA"), which consists of yearly contributions by Xerox of an amount equal to five percent of the employee's salary, accruing interest at a yearly fixed rate of one percent above the one-year Treasury Bill rate. For those employees who began their tenure with Xerox prior to the end of 1989, their CBRA also includes the transferred balance of a Profit Sharing Retirement Account ("Retirement Account") that Xerox maintained for each employee up until December 31, 1989.

  The third calculation method under the Plan, which is only applicable to employees hired by Xerox prior to 1989, is based on the employee's Transitional Retirement Account ("TRA"). The TRA consists of the employee's transferred Retirement Account balance as of December 31, 1989, together with any increase that would have occurred if the balance had remained invested.

  Because the calculation of an employee's benefits is based upon all the employee's years of service, some mechanism is needed to reflect prior lump-sum payments received by employees who, like plaintiffs, had previously left Xerox and then returned. Otherwise, the employee would receive a windfall. To that end, the Plan has, over the years, contained several provisions dealing with offsets for prior distributions. For example, the 1989 RIGP (which is the Plan that plaintiffs contend should be applied here) stated in § 9.6:
Section 9.6. Nonduplication of Benefits. In the event any part or all of a Member's accrued benefit is distributed to him prior to his Normal Retirement Date, if Section 8.8 [dealing with incompetent beneficiaries] does not apply to such distribution and such Member at any time thereafter recommences active participation in the Plan, the accrued benefit of such Member based on all Years of Participation shall be offset by the accrued benefit attributable to such distribution.
Becker Aff. Ex. F. In 1990, the Plan was amended in several respects. Among other things, § 1.8 was amended. Prior to the 1990 amendment, § 1.8 had simply defined the CBRA as "[t]he Account established for a Member pursuant to Article 18." Becker Aff. Ex. F. Article 18 set forth the provisions governing the CBRA. The 1990 Amendment added substantial additional language to § 1.8, including the following:
Where a Member has received a distribution from his Cash Balance Retirement Account prior to the relevant time [i.e., the time as of which the calculation of an accrued benefit is determined], it shall be assumed that his actual Cash Balance Retirement Account balance at the relevant time includes an amount equal to the sum so distributed as it would have increased during the period from the time of the distribution to the relevant time if such sum had continued to be invested in the Cash Balance Retirement Account.
Becker Aff. Ex. F at 89.
  The 1990 amendments also added similar language to § 1.41 of the Plan, which dealt with the TRA. Prior to being amended, § 1.41 of the 1989 Restatement had defined the TRA as "[t]he account established for a Member pursuant to Article 17." Becker Aff. Ex. F. The 1991 amendment to § 1.41 added several provisions regarding the TRA, including the following:
Where a Member has received a distribution from his Transitional Retirement Account prior to the relevant time, it shall be assumed that his actual Transitional Retirement Account balance at the relevant time includes an amount equal to the sum so distributed as it would have increased or decreased during the period from the time of the distribution to the relevant time if such sum had been invested in the General Fund, the Guaranteed Fund, the Income Fund or the Segregated Assets Fund, in whichever the Member participated at the time of the distribution.
Becker Aff. Ex. F at 106.

  A new restatement of the Plan was issued in 1993. The 1993 restatement included language largely identical to that in the above amendments. See Becker Aff. Ex. G at §§ 1.9, 1.41. In addition, the 1993 restatement provided in § 1.45(f) that "[t]he benefit payable under this Plan to such Member who has received a prior distribution will be reduced by the previously distributed amount with adjustments to the `relevant time' under Section 1.9 or 1.41, or at the time of the subsequent distribution under Section 4.2." Becker Aff. Ex. G.

  The Plan has been restated since then, in 1996 and 1998 for example, and each restatement has included language similar to these provisions. See Becker Aff. Ex. H, §§ 1.40, 1.45(f); Ex. I, §§ 1.8, 1.38.

  The Summary Plan Description ("SPD") also contains some discussion of the effect of prior distributions, although the wording of the SPD has changed over the years. In Layaou v. Xerox Corp., 238 F.3d 205 (2d Cir. 2001), the Court of Appeals for the Second Circuit held that the SPD that was in effect in 1994 and early 1995 failed to provide notice to employees that their future benefits would be offset by an appreciated value of any prior lump-sum distributions. In so holding, the court noted that
The only relevant language in Xerox's SPD states that "[t]he amount you receive may also be reduced if you had previously left the Company and received a distribution at that time." The SPD does not mention the term "phantom account," describe the "phantom account" offset concept, or even indicate that the choice among the three methods of calculating future benefits will be made by first adding on, and then later offsetting, not the amount of the prior distributions but instead an appreciated value of the prior lump-sum distributions. Nor does the SPD offer any example of how to calculate benefits for individuals who had received prior lump-sum distributions.
Id. at 210.
  The SPD issued in September 1995, however, contained different language concerning the effect of prior distributions. Specifically, it stated:
It is important to note that if you have received a prior distribution from the plan, this will affect the calculation of your benefit. In calculating your RIGP benefit for the purpose of determining the highest of your TRA, CBRA, or formula benefit, the amount of your prior distribution will be added to your TRA and CBRA accounts, along with hypothetical investment gains and/or losses attributable to the prior distribution, as if the money had been left in your accounts. However, since you already received the prior distribution and there were no actual investment gains and/or losses on this amount, the payment of your RIGP benefit will not include the prior distribution or any hypothetical investment gains and/or losses.
Becker Aff., Ex. K at 10.
  The 1998 SPD also set forth this concept in some detail. It stated, "If you previously received a distribution from RIGP, this prior distribution will affect future benefits payable to you under the Plan." Becker Aff., Ex. L at 51. The SPD then set forth three steps for calculating the benefits payable to employees who had received prior distributions, as follows:
Step 1: Calculate the current value of your prior distribution
To determine what the value of your accounts would have been if you had not taken a distribution, take the amount of each account at the time it was distributed to you and add the investment results the accounts would have earned had a distribution not been taken.
Step 2: Determine the greatest total benefits
Add the current values of the CBRA and TRA that were previously distributed to any actual amounts earned since your rehire date. Using these total amounts, compare the three components-retirement plan formula, total CBRA, and total TRA — to determine the greatest benefit.
Step 3: Reduce the greatest total benefit by the current value of the prior distribution
Your future pension payment will not include the current value of your prior distribution. The greatest total benefit calculated in Step 2 will be reduced by the current value of your prior distribution. Your future pension payment will not include the current value of your prior distribution. The remaining benefit, if any, is the amount payable to you when you leave.
Becker Aff., Ex. L at 52. The 1998 SPD also explains the reason why prior distributions affect future benefits. It states:
Length of benefit service is a key factor in determining retirement benefits. Calculating and including the current value of prior distributions puts employees who took a prior distribution on the same level as employees whose balances remained invested in the plan. Without this adjustment, employees who took a prior distribution could receive higher (or lower) benefits than employees who had no prior distributions. This process ensures that the Company provides the same benefit dollars for employees with the same pay and benefit service — whether or not there was a prior distribution.
Becker Aff. Ex. L at 53. The SPD then went on to provide three examples of benefits would be calculated under the TRA, CBRA, and RIGP formulas, where the employee had received a prior distribution. Id. at 53-54.

  II. Application of Offset Provisions to Plaintiffs

  The actual operation of these Plan provisions concerning prior-distribution offsets can be illustrated by examining how they were applied to the plaintiffs in this case. As stated, the plaintiffs are all current or former employees of Xerox, each of whom worked for Xerox during two separate periods of time. During their original periods of employment, each plaintiff (with one exception, see n. 14, infra) was a participant in the Plan. Upon their initial termination of employment, each plaintiff elected to receive a lump-sum distribution of his pension benefit. The employee obviously used that distribution as he/she saw fit. Each plaintiff was later re-hired by Xerox and again became a participant in the RIGP. Under the terms of the RIGP as described above, the amount of each plaintiff's current pension benefit was (or will be) offset by the amount of the prior distribution plus any earnings which would have accrued had plaintiffs left the amount of their distribution in the Plan.

  The genesis of the present dispute occurred in 1996, when plaintiffs Frommert and Clair sought clarification from Xerox of their projected future benefits. They complained when they discovered that their projected monthly benefits would be much lower than they had expected, due to the phantom account offset.

  Although the exact figures differ from plaintiff to plaintiff, in general the process by which the administrator arrived at their monthly benefits was the same with respect to all ...

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