The opinion of the court was delivered by: Michael B. Mukasey, U.S.D.J.
Plaintiffs Timothy Laurent, Smeeta Sharon, and Michael A. Weil sue Defendant PriceWaterhouseCoopers ("PWC") alleging that PWC's Retirement Benefit Accumulation Plan for Employees of PricewaterhouseCoopers LLP ("the RBAP") violates the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. (2000) ("ERISA"). In particular plaintiffs allege that the RBAP violates ERISA's standards for calculating lump-sum benefits payable from a cash balance pension plan, standards for calculating accrued benefits, and age discrimination rules. PWC has moved to dismiss all four claims, denominated "counts," of plaintiffs' First Amended Class Action Complaint. For the reasons stated below, PWC's motion to dismiss is denied as to the first claim, but is granted as to the second, third, and fourth claims, which are dismissed.
Because all assertions in the complaint are accepted as true upon a motion to dismiss, DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1244 (2d Cir. 1987), the following facts are based on plaintiffs' amended complaint and those documents which are incorporated into the amended complaint by reference. See Fed. R. Civ. P. 10(c).
Federal law recognizes two forms of employer-provided pension plans: defined benefit plans and defined contribution plans. In a defined contribution plan, an individual account is established for each participant and the employer makes periodic contributions to that account. The participant's retirement benefit is the balance in the individual account. A defined benefit plan entitles a participant to fixed periodic benefit payments upon retirement that are paid out pursuant to a formula outlined in the plan.
On July 1, 1994, Price Waterhouse LLP replaced its previous retirement plan with a defined benefit plan identical to the RBAP. (Amended Compl. ¶17) On July 1, 1998, Price Waterhouse LLP and Coopers & Lybrand LLP merged to create PWC. (Amended Compl. ¶18) On July 1, 1999, the Coopers & Lybrand retirement plan merged with the Price Waterhouse retirement plan to form the RBAP. (Amended Compl. ¶18)
The RBAP is a "cash balance" defined benefit plan sponsored by PWC that covers its entire workforce. (Amended Compl. ¶1) A cash balance plan is a defined benefit plan that strongly resembles a defined contribution plan. See Esden v. Bank of Boston, 299 F.3d 154, 176 (2d Cir. 2000). Under a cash balance plan, a hypothetical account is established in each participant's name and the benefits payable under the plan are calculated based on the value of that hypothetical account. (Amended Compl. ¶19) The account is funded by PWC's hypothetical "contributions" in the form of "pay credits" and hypothetical earnings expressed as "interest credits." (Amended Compl. ¶20)
Instead of using guaranteed periodic interest credits based on a fixed or variable rate to value the hypothetical interest credits, the RBAP adjusts account balances daily by hypothetical interest credits that reflect the hypothetical performance of investment vehicles chosen by each participant from a PWC selected list of investments. (Amended Compl. ¶21) The RBAP participant accounts are updated daily so that participants can track their hypothetical investment choices. (Pl. Mem. of Law, Ex. C) Therefore, although a defined benefit plan, the RBAP is designed to mimic a defined contribution plan in that it does not guarantee its participants any return on the hypothetical investments that constitute their pension.
The RBAP allows most participants to leave their account balances in the RBAP after terminating employment or retiring; if the participant does so he will continue to receive interest credits even though he is no longer a PWC employee. (Amended Compl. ¶ 22) A participant with an account balance over $5,000 at the time his employment ends can leave his benefits in the RBAP through April 1 of the year following the later of his retirement or the date he reaches age 70 1/2 . (Amended Compl. ¶22) Thus, the RBAP is a "front-loaded" interest credit plan, defined as one in which "future interest credits to an employee's hypothetical account balance are not conditioned upon future service." I.R.S. Notice 96-8 at 4. To be tax-qualified, a cash balance plan must be front-loaded, I.R.S. Notice 96-8, "that is, [it] must include interest on the money in the employee's hypothetical account for the period between his leaving the employer and his reaching" the normal retirement age. Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 762 (7th Cir. 2003).
Under the RBAP, a participant is fully vested after 5 years of employment with PWC, meaning PWC must then provide the employee with 100% of PWC's contributions to his RBAP account. (Amended Compl. ¶24) RBAP participants who leave PWC after this five year vesting period can elect to receive their "normal retirement benefit" as a lump sum distribution at the time they leave.
The RBAP states that "[a] Participant's Normal Retirement Benefit shall be an amount equal to the Actuarial Equivalent (calculated by projecting the Deemed Account Balance to Normal Retirement Age using the Deemed Plan Interest Rate) of his or her Deemed Account Balance." (Amended Compl. ¶28) The Deemed Plan Interest Rate is defined as the annual rate of interest equal to the interest rate on 30-year Treasury securities, as specified by the IRS for the month of February (or before July 1, 2001, the month of May) immediately preceding the plan year in which the calculation is made. (Amended Compl. ¶29) The RBAP defines normal retirement age as "[t]he earlier of a date a Participant attains age 65 or completes five (5) Years of Service." (Amended Compl. ¶30)
Plaintiffs Laurent, Sharon, and Weil are former PWC employees who were and are RBAP participants. (Amended Compl. ¶¶ 11-13) In 2002, Laurent ended his employment with PWC and requested a single lump-sum distribution of his benefits. (Amended Compl. ¶11) On May 20, 2002, Laurent was paid the balance of his cash balance account, and he claims that he was paid an amount less than the value of his accrued benefit as defined under ERISA. (Amended Compl. ¶11) In 2002, Sharon's employment with PWC ended and she requested a single lump-sum distribution of her benefits under RBAP, which she received on April 30, 2002. (Amended Compl. ¶12) Sharon was paid the balance of her cash balance account, an amount she claims was less than the value of her accrued benefit. (Amended Compl. ¶12) Weil ended his employment with PWC on December 14, 2001 but has not requested a lump-sum distribution under the RBAP. (Amended Compl. ¶13) Laurent, Sharon, and Weil had fully vested accounts under the RBAP and all of their account balances exceeded $5000 at the time their employment with PWC ended. (Amended Compl. ¶24)
In a September 1999 letter to the IRS, PWC stated that "a low normal retirement age in a qualified defined benefit plan" was PWC's response to "poor rule making by the Treasury Department" and that such a low normal retirement age should not be considered to be an attempt to circumvent "reasonable" rules. (Amended Compl. Ex. 1) Further, PWC contends that the regulatory requirement that a "lump sum may never be less than the present value of the annuity payable at a participant's normal retirement date at a mandated interest rate" is "neither mandated nor suggested by the law or the legislative history." (Amended Compl. Ex. 1) PWC continued on to explain that it was adopting a low normal retirement age so that it would not be forced by the IRS regulations to provide employees seeking a lump-sum distribution with more money than was in their hypothetical account at the time of the distribution. (Amended Compl. Ex. 1)
In their first claim, plaintiffs allege that the RBAP violates ERISA, because under the RBAP the accrued benefit is not expressed in terms of the annuity that it will yield at normal retirement age and the lump sum benefit paid to the plaintiffs is worth less than such an annuity. (Amended Compl. ¶36) Specifically, plaintiffs allege the RBAP's "normal retirement age" of five years of service is invalid under ERISA and, in the alternative, is invalid because it was not stated clearly in PWC's Summary Plan Description ("SPD"). Under plaintiffs' theory, the normal retirement age under the RBAP becomes the statutory default of age 65 because the RBAP did not provide for an alternative, valid normal retirement age. Thus, as a cash balance defined benefit plan paying lump-sum distributions to former employees who had not reached the normal retirement age, the RBAP was required to project the balance of the hypothetical account forward to age 65 and then pay out the present value of that projected balance. (Amended Compl. ¶¶ 37-38) Additionally, plaintiffs allege the RBAP violates ERISA because it does not provide a projection rate that accurately reflects a reasonable estimate of future interest credits. (Amended Compl. ¶ 59)
Second, plaintiffs claim that the RBAP violates ERISA, because after a participant satisfies the vesting standards her benefit is conditioned on the distribution option chosen. (Amended Compl. ¶68) Specifically, plaintiffs take issue with the RBAP's definition of a participant's accrued benefit as that participant's hypothetical current account balance, which they allege is an incomplete definition because it does not reflect the participant's total "accrued benefit" as defined under ERISA. (Amended Compl. ¶69) Because a participant who leaves his money in the RBAP after he reaches normal retirement age can continue to receive interest credits until age 70 1/2 , plaintiffs argue that a participant's accrued benefit under the RBAP includes both his current account balance and the stream of future investment credits payable with respect to that account balance until the participant reaches age 70 1/2 . (Amended Compl. ¶ 70)
Third, plaintiffs claim that the RBAP violates the ERISA age discrimination rules, because the older RBAP participants accrue less benefits than younger employees who receive the same pay and interest credits. (Amended Compl. ¶¶ 76-78)
Fourth, plaintiffs claim that the RBAP violates ERISA because it does not actuarially increase a participant's benefit after normal retirement age. (Amended Compl. ¶¶ 81-84) Although the RBAP continues to provide interest credits to participants after the normal retirement age who leave their money in the RBAP, plaintiffs allege these interest credits are not a substitute for an actuarial adjustment because they do not maintain the actuarial value of a participant's normal retirement benefit or any larger benefit accrued as of a date after normal retirement age. (Amended Compl. ¶ 85)
In deciding a rule 12(b)(6) motion to dismiss, the allegations of the complaint are taken as true and construed in a manner favorable to the plaintiffs. Hoover v. Ronwin, 466 U.S. 558, 587 (1984); Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). Such a motion can be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief," Conley v. Gibson, 335 U.S. 41, 45-46 (1957), and cannot be granted merely because recovery appears unlikely on the face of the complaint. Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996).
The RBAP is a defined benefit plan under ERISA even though it imitates a defined contribution plan and "[t]he regulatory consequences of this classification are wide-reaching." Esden, 229 F.3d at 158. Under ERISA, a defined contribution plan is "a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses . . . ." ERISA § 3(34). A "defined benefit plan" is any plan other than a defined contribution plan, thus a cash balance plan such as the RBAP is a defined contribution plan. ERISA § 3(35).
Cash balance plans differ from the traditional final-pay plans for which the defined benefit plan regulations were designed, and ERISA sometimes requires "outcomes that are in tension with the objectives" of the cash balance plans. Esden, 229 F.3d at 159. Thus, ERISA can mandate the completion of a "whipsaw" calculation to determine the correct value of a cash balance plan that is distributed as a lump-sum before normal retirement age. Under ERISA, any distribution from a cash balance plan other than a single-life annuity payable at normal retirement age must be "no less than the actuarial equivalent of such benefit. For a cash balance plan this calculation involves projecting the cash balance forward and then discounting back to present value." Id. It is the forward projecting and discounting back that accounts for the whipsaw terminology. Under a whipsaw calculation, if a plan's projection rate is higher than the statutorily prescribed discount rate, the present value of the accrued benefit will exceed the participant's account balance. If that higher accrued benefit is not paid out, an impermissible forfeiture has occurred in violation of ERISA § 203(a) and I.R.C. § 411(a)(2).*fn1 Esden, 229 F.3d at 159. Thus, in calculating the accrued benefit due to PWC employees based upon a normal retirement age, PWC can be required to engage in a whipsaw calculation. Esden, 299 F.3d at 173 ("[a] defined benefit pension plan, including one adopting a cash balance format, need not offer a lump-sum distribution as an optional form of benefit . . . when it does so provide, that distribution must be the actuarial equivalent of the accrued benefit valued according to the statutory methodology . . . The Plan cannot contract around the statute." (internal citations omitted)).
A. Calculation of a lump-sum distribution under the RBAP
Under ERISA, a "normal retirement benefit" is "the greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age." ERISA § 3(22); I.R.C. § 411(a)(9). Normal retirement age is defined as 65, unless otherwise provided by the pension plan. ERISA § 3(24); I.R.C. § 411(a)(8). The RBAP defines normal retirement age as the earlier of age 65 or five years of service. (Amended Compl. ¶ 30). Thus, the relevant question to determine if plaintiffs' lump-sum distributions were properly calculated is whether plaintiffs had reached normal retirement age at the time they consented to such a distribution. If plaintiffs had not reached normal retirement age, then the lump-sum distribution must be equivalent to the present value of the single-life annuity that would be payable if the participant had reached normal retirement age.
The RBAP's defined normal retirement age of five years of service is invalid and, therefore, the normal retirement age under the RBAP becomes the statutory default of age 65. The RBAP normal retirement age is invalid because it is expressed as a term of years of service as opposed to a certain, specified age in contravention of the intent of ERISA as interpreted by the Second Circuit. In the alternative, the RBAP normal retirement age is invalid, because it was not defined, or even mentioned, in the RBAP Summary Plan Description ("SPD"); the SPD controls when it conflicts with the pension plan itself, thus the RBAP has no defined normal retirement age and the age 65 statutory default applies. Further, defendant's argument that a whipsaw calculation does not apply because the RBAP did not guarantee its participants a minimum interest rate is without ...