Anyone Got A Magic Bullett?

[Andy the Actuary]

Client has sold assets of business and is in process of terminating its union plan. In days of yesteryear, client maintained two DB plans -- one covering its union employees; one, covering management. Union plan was $/service; management was final pay. Management plan was terminated 3 years ago and benefits were distributed. Management plan had provision that if employee transferred from nonunion to management, employee would get greater of (a) final pay plan benefit using service from date of transfer or (b) final pay benefit using all service with carve out of union benefit.

When management plan terminated, an employee's distribution was based upon a union carve out of about $800/month. Now, management has advised that service history provided for union employee was incorrect (that while a union member, employee hadn't been union pension eligible for some of the years) and that carve out should only be $100/month.

Ergo, if union plan pays $100 month benefit (what other choice is there?), employee was shorted in his management plan distribution.

Any thoughts of how to handle this? (I won't cloud your thinking with what I intend to suggest.)

[Mike Preston]

I would need one thing clarified first. Are the years which are no longer being counted in the determination of the offset also no longer counted on the front end of the formula. Are you sure there is an underpayment involved? Might it go the other way?

[Guest mjb]

There are no answers just questions.

1. While employee has a claim for benefits under the mgt plan, the s/l for filing a claim is determined by the most analgous state law. Some states have a S/l of 3 yrs or less. S/l begins when the incorrect benefit is paid.

2. Even if S/l has not expired I dont know how he could sue a plan that has been terminated for 3 years since there are no assets which can be used for payment. I dont know if the employer could be forced to reopen the plan or if the fiducaries could be sued.

3. I dont know if the participant could file a claim as a creditor against the employer before it liquidates and winds up its business. Employee needs to consult a corporate or bankruptcy lawyer.

[Andy the Actuary]

I would need one thing clarified first. Are the years which are no longer being counted in the determination of the offset also no longer counted on the front end of the formula. Are you sure there is an underpayment involved? Might it go the other way?

Clarification: No, recalculated management benefit taking into account reduced past service at time of payment. I.e., management plan will have underpayed benefit.

I intentionally left out a critical piece of information the first goaround. Affected person is a relative so litigation should not be an issue. Assume person will be made reasonably whole one way or another.

Thanks for the comments.

[Mike Preston]

I would say that I have even more questions, but my conclusion is that in the confines of a terminated plan, there is nothing that can or should be done. At one end you have a participant that was somehow hoping to get benefits ($800/month) that they weren't ultimately entitled to. At the other end, you have an unfortunate cascading of events: not only does the anticipated benefit entitlement disappear ($800 to $100 is very close to disappearing), but you also have the paid out benefit from the management plan being based on the $800.

But, if I wanted to look further into this, I'd see what the paperwork was that surrounding the distribution from the management plan. My guess is that it is drafted in such a way as to cast the final distribution in concrete.

[Andy the Actuary]

Thanks, Mike

[jpod]

My gun is not loaded, but I'll throw this out to you.

Is there any authority under the Code that would allow the employer (or an issuing insurance company) to take the position that any "make-whole" payment to the employee, either through a lump sum cash payment or the purchase of an annuity, should have the same attributes as a lump sum payment or annuity coming out of the terminated plan?