calculating the offset under Miller v Xerox Corp.

[Everett Moreland]

http://www.ca9.uscourts.gov/ca9/newopinion...pdf?openelement

Miller v Xerox Corp. (9th Circuit 5/8/06), at the above link, deals with offsetting the accrued benefit in a floor-offset plan for an earlier distribution from a defined contribution plan. Miller requires limiting the offset to the "accrued benefit attributable to the distribution" within the meaning of 1.411(a)-7(d)(6)(i). Miller requires, I think, calculating the accrued benefit the lump sum value of which, on the date of the earlier distribution, equals the earlier distribution. My question is, where the earlier distribution was a lump sum, is this actuarial equivalence to be calculated using the plan's interest rate and mortality table for lump sums or the plan's interest rate and mortality table for annuities? The logic of Miller seems to require using the plan's interest rate and mortality table for lump sums.

[Guest Harry O]

Ah, the wild and wacky Ninth Circuit. Let's see . . . Ninth Circuit + ERISA case = employer loses. Always.

My view (CAVEAT: I'm not an actuary nor do I play one in real life) is that the court recognized that the annuity benefit under the DB plan is being offset by the annuity benefit that can be purchased by the DC plan. Two things need to be calculated, I think. First, the DC benefit must be projected to NRA. I would think only an interest assumption is relevant here. Xerox used the rate of return under the DC plan at the time of distribution. The court objected without saying what rate of return was reasonable. The second calculation would be to convert the projected hypothetical DC balance at NRA to an annuity. The plan should be able to specify an annuity purchase factor for this purpose using whatever assumptions it wants as long as they are reasonable. I don't see any requirement in the decision or existing law to use the 417(e) factors for this purpose.

I'd be interested in what our actuary friends have to say about this . . .

[Everett Moreland]

Harry O;

Thank you for your reply. I'm concerned that the following from Miller means that the offset for the DC distribution should not be determined by projecting the distribution to normal retirement age using an interest assumption, but instead should be determined by calculating the accrued benefit the lump sum value of which, on the date of the earlier distribution, equals the earlier distribution:

"An accrued benefit under a defined benefit plan is ordinarily expressed as an annuity commencing at normal retirement age. See 29 U.S.C. § 1002(23)(A). Thus, the 'accrued benefit attributable to the distribution' for each Employee should be expressed as an annuity. When the Employees first left Xerox, they received Profit Sharing Plan distributions because their Profit Sharing Plan account balances exceeded the accrued benefit which they were guaranteed under the Income Guarantee Plan formula. Essentially, the Profit Sharing Plan distributions substituted for the lump-sum equivalent of the Income Guarantee Plan formula benefit, because the Profit Sharing Plan accounts could have purchased a larger annuity. The accrued benefit attributable to the Profit Sharing Plan distributions is simply the Income Guarantee Plan annuity amount that those distributions replaced. The portion of the Profit Sharing Plan distributions that exceeded the lump-sum value of the Income Guarantee Plan annuity benefit represented a payment from an individual, defined contribution account, not any portion of an 'accrued benefit' under the Income Guarantee Plan defined benefit formula. That excess distribution, and any change in the value of the distribution, should not affect the amount of the 'accrued benefit' — under the Income Guarantee Plan defined benefit formula — that was attributable to the distribution when it was made. In short, Xerox may not use a projected-to-the-present value generated from a phantom account as a proxy for the actual distribution amount."

[Mike Preston]

I read the language as being even more strange than you do. I see the court's position as actually punishing Xerox for trying to determine the offset using theoretical earnings between date of earlier distribution and later calculation. I think Xerox was wrong to do what it tried. And I think the court is wrong in its interpretation. Hopefully, the Supreme Court will set the record straight.

The way I read the ruling, the following is what Xerox wanted to do:

DB Benefit on initial date of termination: $300/month

DC Account balance on initial date of termination: $X (the exact amount isn't relevant)

Converted value of $X on initial date of termination: >$300/month (the exact amount isn't relevant)

DB Benefit on later date of termination: $1,500/month

DC Account balance on later date of termination : $Y

Converted value of $Y on later date of termination: $Y'

The court seems to be arguing for a final DB benefit equal to: $1,500 less $300 less $Y'.

What Xerox appears to have wanted to do is to determine what $X would have grown to between initial date of termination and later date of termination and then convert that value as an offset as of the later date of termination. Let's say that amount turns out to be $900/month, they would have the participant get $1,500 less $900 less $Y'.

Note that the $900 offset comes from the initial $X, only a percentage of which was actually used as an offset at the time.

Let's say, for argument's sake, that $X would have been an offset of $450/month had the DB accrued benefit been $450 or more.

This means that 1/3 of the original account balance (that wasn't used as an offset the first time around) becomes an offset the second time around.

I would have thought the appropriate determination at the later date would have been $1,500 less $450 less $Y'.

So, the choices seem to be:

a) $1,500 less $300 less $Y'

b) $1,500 less $450 less $Y'

c) $1,500 less $900 less $Y'

The Court decided on (a). I would have chosen (b). Xerox, based on good returns between initial date of termination and final date of termination, decided on ©.

As I said, I think the Court punished them, by choosing the worst possible outcome for Xerox they could come up with.

What the Court seems to be saying, to me, is that the offset, when first applied is cast in concrete. That the PS account balance, whatever it is, can only be taken into account to the extent it is actually used to reduce a true "accrued benefit" in the defined benefit plan. Once it is used, it is gone. In essense, the employer forfeits the right to use it as an offset against future benefits that might accrue in the defined benefit plan.

I actually hope that my understanding of the decision is wrong and that, if it is right, that the Supreme Court makes the Ninth circuit abandon this interpretation.

[Everett Moreland]

Mike:

My reading of Miller (which I think is the same as yours) is that the excess of the converted DC account balance at the first termination over the DB benefit at the first termination cannot be used to offset the DB benefit at the later termination. I think the opinion is clear on that.

Do you think the opinion requires using the lump sum interest rate and mortality table to convert the DC balance at the first termination to an annuity at the second termination?

[Everett Moreland]

Mike:

Ignore my question in my prior post. After reading Miller and your post again I think I've at last got it--the amount of the DB accrued benefit at the second termination that is offset by the DC account balance at the first termination equals the amount of the DB accrued benefit at the first termination that was offset by the DC account balance at the first termination.

Harry O:

I now understand your post.

[Guest Harry O]

Everett,

Your postings made me go back and read this decision more carefully. What a mess. I'm not sure how any existing floor offset plan would remain qualified after this decision.

As you said, the court seems to say that you can only use the DC benefit (presumably converted to a deferred annuity) to offset the DB accrued benefit at the time of initial termination of employment. Any excess benefit that can be purchased by the initial DC distribution is forever ignored even when the employee is rehired. This makes no sense. The result is that the DC offset can never exceed the DB benefit accrued at the time of the prior distribution.

It is interesting to note that the IRS ruling (RR 76-259) in this area seems to contemplate that prior distributions can reduce subsequent accruals. This is also how every offset plan I've ever seen works. This decision is simply wrong and will hopefully be reversed. I suspect Xerox is probably trying to get this re-heard.

Thanks for bringing this case to our attention.