Guest Article

(From the April 12, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Sixth Circuit to Review Lump Sum Calculation Case

A case now pending before the Sixth Circuit Court of Appeals raises the question of whether certain defined benefit plans can use pre-retirement mortality assumptions to calculate pre-retirement lump sum distribution amounts. The case, Crosby v. Bowater Incorporated Retirement Plan for Salaried Employees of Great Northern Paper, Inc., 2002 U.S. Dist. LEXIS 22797 (W.D. MI 2002), is on appeal from a federal district court that ruled, where accrued benefits are payable as a death benefit, pre-retirement mortality assumptions should not be applied to calculate lump sum payment amounts.

Case Facts

The plaintiff, Frank Crosby, had been an employee of Great Northern Paper, a Bowater Incorporated subsidiary. When Bowater sold Great Northern Paper, Mr. Crosby elected to take a pre-retirement lump sum distribution of his vested benefit in the Bowater Incorporated Retirement Plan for Salaried Employees of Great Northern Paper, Inc. The plan administrator converted his accrued benefit to a lump sum amount, and then used a discount rate and mortality table to determine the present value of that benefit. This resulted in a lump sum payment to Mr. Crosby of $52,013.90.

Mr. Crosby sued on behalf of himself and similarly situated participants, claiming the plan's method of calculating lump sums violates ERISA's anti-forfeiture rules. Specifically, he argues his accrued benefit under the plan includes the right to receive a pre-retirement lump sum distribution that is not discounted for mortality. If the mortality discount had not been applied, his lump sum payment would have been $57,262.98.

District Court Analysis

The district court started its analysis by acknowledging that IRC section 417(e)(3) specifically permits plans to use a specified interest rate and mortality table to determine the present value of a participant's accrued benefit for purposes of the mandatory cash out rules. Also, the relevant Treasury regulations (Treas. Reg. Sec. 1.417(d)-1) permit plans to use this methodology to calculate lump sum distribution amounts. In this case, the plan is silent on whether the plan administrator should use a mortality discount to calculate pre-retirement lump sums.

After embarking on a tangent about the role mortality assumptions play in funding defined benefit plans (and do not play in funding defined contribution plans), the district court next turned to the issue it believes is central to this case: whether the plan's death benefit is an ancillary benefit, which the plan could reduce or eliminate at any time, or part of participants' accrued benefits.

For this purpose, the district court turned to the relevant plan language, which provides:

If a participant dies prior to his Normal Retirement Date, then no benefit of any kind shall be payable from this Plan and Trust except for the death benefit (if any) provided for in this Death Benefit Section. The amount of the Participant's death benefit shall be the then vested present value of the Participant's Accrued Benefit accrued to date of death ....

According to the district court, this plan language creates an "accrued right." As such, the court concluded the plan in this case cannot use a mortality assumption to calculate pre-retirement lump sum payment amounts because doing so results in a forfeiture of vested accrued benefits.

The district court cited IRS Notice 96-8, 1996-1 C.B. 359, which relates to calculating lump sum distribution amounts from cash balance plans, and several recent related cases-- Lyons v. Georgia-Pacific Corp., 221 F.3d 1235 (11th Cir. 2000); Esden v. Bank of Boston, 229 F.3d 154 (2nd Cir. 2000); and Berger v. Xerox Retirement Income Guaranty Plan, 231 F. Supp. 2d 804 (S.D. Ill. 2002)-- as supporting its conclusion. The district court's decision does not say whether the plan at issue in this case is a cash balance plan.

Issues for Plan Sponsors to Consider

Plan sponsors within the Sixth Circuit's jurisdiction (Kentucky, Michigan, Ohio, and Tennessee) should be aware of this decision and how it might affect their ability to continue using mortality assumptions when calculating pre-retirement lump sum distribution amounts. However, it is also important to keep in mind that the district court's decision does not have general precedential value, and may ultimately be overturned by the Sixth Circuit Court of Appeals.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Tom Brisendine 202.879.5365, Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955. Copyright 2004, Deloitte.