LYNN ESDEN, Individually and on Behalf of All Others Similarly Situated, Plaintiff-Appellant, v. BANK OF BOSTON, and Certain Affiliated Companies, RETIREMENT PLAN OF THE FIRST NATIONAL BANK OF BOSTON, and Certain Affiliated Companies, Defendants-Appellees.
Docket No. 99-7210
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
Argued: November 29, 1999; Decided: September 12, 2000
229 F.3d 154
Before: NEWMAN, LEVAL and POOLER, Circuit Judges.
REVERSED and REMANDED.
DOUGLAS R. SPRONG, Belleville, Ill. (Steven A. Katz, Carr, Korein, Tillery, Kunin, Montroy, Cates & Glass, Jerome O‘Neill, O‘Neill, Crawford & Green, on the brief) for Plaintiff-Appellant.
GEORGE MARSHALL MORIARTY, Boston, Mass. (Crystal D. Talley, Ropes & Gray, on the brief) for Defendants-Appellees.
LEVAL, Circuit Judge:
Plaintiff Lynn Esden, individually and as class representative,1 appeals from the Order and Judgment of the United States District Court for the District of Vermont (William K. Sessions, III, Judge), entered on September 29, 1998, granting summary judgment in favor of defendant, The Retirement Plan of The First National Bank of Boston (the “Plan“), see Esden v. Retirement Plan of the First Nat‘l Bank of Boston, 182 F.R.D. 432 (D. Vt. 1998) (“Esden I“), and from the unpublished Supplemental Opinion and Order, entered on February 10, 1999, denying her motion to alter or amend the judgment, see Esden v. Retirement Plan of the First Nat‘l Bank of Boston, No. 2: 97-cv-114 (D. Vt. Feb. 10, 1999) (“Esden II“).
This case concerns the application of parallel statutory provisions of the Internal Revenue Code (“I.R.C.” or the “Code“),
We therefore REVERSE the judgment of the district court and REMAND for further proceedings.
A. Cash Balance Plans and the issue of “Whipsaw.”
Under a cash balance pension plan, a hypothetical account is established in each participant‘s name. Benefits are credited to that “account” over time, driven by two variables: (1) the employer‘s hypothetical “contributions,” and (2) hypothetical earnings expressed as interest credits. Employer “contributions” are usually expressed as a percentage of salary, the rate of which may vary with employee tenure. Interest credits may be at a fixed interest rate, but more often they are tied to an extrinsic index—for example, U.S. Government securities of a specified maturity—and they vary accordingly. Each year an employee receives a statement of her “account” balance, and can therefore see the value of her pension benefit. These features are designed to mimic the simplicity of a defined contribution plan.45
However, notwithstanding that cash balance plans are designed to imitate some features of defined contribution plans, they are nonetheless defined benefit plans under ERISA.6 The regulatory consequences of this classification are wide-reaching. First,
It is undisputed that the governing statutes and regulations were developed with traditional final-pay defined benefit plans in mind; they do not always fit in a clear fashion with cash balance plans and they sometimes require outcomes that are in tension with the objectives of those plans. In the argot of pension law practitioners, this case involves the phenomenon of “whipsaw.”7 In brief, the rules governing distributions from defined benefit plans are framed in terms of the normal retirement benefit—typically, a single-life annuity payable at normal retirement age. Any distribution in optional form (such as a lump sum) 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. The projection rates may be defined by the plan; but the discount rate is prescribed by statute. If the plan‘s projection rate exceeds the statutory discount rate, then the present value of the accrued benefit will exceed the participant‘s account balance. Unless this higher figure is paid out, the IRS takes the view that an impermissible forfeiture has occurred in violation of
The IRS‘s consistent interpretation of the statutes and its own regulations is reasonable and is entitled to deference. We therefore conclude that the district court erred in giving effect to the terms of the plan rather than enforcing the statutory and regulatory scheme as authoritatively interpreted by the IRS.
1. Esden‘s employment.
The material facts are not disputed. Esden was employed by Bank of Vermont (and its predecessor) from 1974 to December 7, 1990. During this time the Bank of Vermont became an indirect subsidiary of Bank of Boston, the Plan‘s sponsor. Throughout this time Esden was a participant in the Plan. The Plan was at all times a defined benefit plan subject to ERISA. Before 1989, the plan was a traditional defined benefit plan, employing a final-pay formula. Effective January 1, 1989, the Plan was amended to become a cash balance plan.8 After its amendment the Plan was twice reviewed by the IRS, in 1990 and again in 1995. On each occasion the IRS issued a determination letter stating that the Plan was a “qualified plan” pursuant to
On the termination of her employment, the pension benefits Esden had accrued were 100% vested. See
The remaining $1,547.73 represented the balance of her Cash Balance Account and was paid out as the lump-sum equivalent of all accrued benefits to which she was entitled under the cash balance plan (“Cash Balance Benefit“). This dispute arises over whether the Plan‘s methodology for calculating this amount was permissible under the parallel statutory provisions of ERISA and the Code and the regulations promulgated thereunder. We hold that it was not.
2. The Plan
The Plan is a cash balance plan. The following provisions of the Plan are relevant to this appeal. Under section 3.1, a hypothetical Cash Balance Account is established for each participant. Section 3.2 provides for employer contributions (termed “Annual Cash Balance Credits“) to each active participant‘s Cash Balance Account, expressed as a percentage of the employee‘s compensation. This Credit varies from 3.25% of salary in an employee‘s second year of employment through a maximum Credit of 11.0% of salary for employees in their 20th through their 34th year of employment. Under sections 3.3 and 12.29 interest is also credited to the participant‘s Cash Balance Account annually, at a rate equal to the average of the three-month Treasury Bill rates in effect on the first day of each month plus 0.5% (the “Interest Credit“). However, the rate of the Interest Credit is never to exceed 10.0% nor to be less that 5.5%. Under section 6.4, after five years of service, a participant‘s accrued benefit becomes 100% vested; if the employee is terminated before that time, however, then all accrued benefits are forfeited. Cf.
The Annual Cash Balance Credits to the employee‘s hypothetical account cease on termination of employment. However, the annual Interest Credits continue to be credited to the account until distribution of benefits begins.
The Plan provides several payment options. At the time of Esden‘s termination, because the total value of her Retirement Plan Benefit (defined as the sum of her Cash Balance Benefit and her Prior Plan Benefit) exceeded $3,500, and because she was married, the Plan provided that her benefit would be paid automatically as a 50% Joint and Survivor Annuity beginning at age 65, unless she elected another option. Her other relevant options included taking an actuarially reduced annuity at any time after age 55 or taking a lump-sum distribution at any time before age 65. She elected to take the lump-sum distribution.
At the time of her termination, Esden had $1,533.98 in her cash balance account. It is undisputed that, had Esden not elected to take her benefit in the form of a lump sum, the minimum amount of her accrued benefit, expressed as a lump sum at normal retirement age of 65, would have been $7,086.83. This figure is calculated by projecting the Cash Account Balance from Esden‘s termination date through age 65, assuming annual Interest Credits of 5.5%.10 The defendant rightly characterizes this as an “estimate.” Insofar as actual Interest Credits would fluctuate with the average 3-month Treasury Bill rate to which they are indexed, then Esden‘s actual accrued benefit at age 65 would differ. But this amount is also a minimum: under no circumstances, pursuant to the terms of the Plan, could Esden‘s accrued benefit at age 65 be less than $7,086.83 because the annual Interest Credit was guaranteed to be at least 5.5%. In the same manner, the maximum amount of her accrued benefit can be calculated by projecting Esden‘s cash balance account through age 65, assuming annual Interest Credits of 10.0%, the maximum rate allowed by the plan. This calculation yields a balance of $23,386.18. There is no dispute that, had Esden not elected a lump-sum distribution on termination, then her accrued benefit, expressed as a lump sum payable at normal retirement age, would have fallen within the range $7,086.83-$23,386.18. No other amount was possible under the terms of the Plan. Discounted to present value, as of the date of Esden‘s termination, according to the methodology required by
The Plan is drafted so that whenever a participant elects a lump-sum distribution, the benefit received will always be her Current Cash Balance Account. In sum, the Plan employs language that attempts to comply with the traditional annuity-based framework of the Treasury regulations, while guaranteeing that the lump-sum distribution would always be the Current Cash Balance Account. To achieve this result, section 4.1 of the Plan provides that at any time a participant‘s “Accrued Amount” is her “Current Cash Balance Annuity.” Under section 4.2, the “Current Cash Balance Annuity” is calculated by (1) projecting the Current Cash Balance Account to age 65 at a rate of 4% compounded annually, and then (2) converting this amount into a single-life annuity payable monthly by applying an annuity factor not in dispute. In short, the Plan is drafted to ensure that a participant‘s Normal Retirement Benefit (defined as her Accrued Amount determined as of Normal Retirement Age of 65) is always projected at a rate of 4%, notwithstanding that actual Interest Credits, while variable, cannot accrue at a rate lower than the guaranteed minimum rate of 5.5%.
In the case of an election to take a lump-sum distribution, under section 7.4(d) of the Plan, the amount paid out is the greater of the actuarial equivalent of the Current Cash Balance Annuity or the Current Cash Account Balance. The mortality and interest rate assumptions to be used in determining actuarial equivalence are set out in Exhibit A of the Plan. As required by
Having exhausted her administrative remedies under the Plan, Esden brought this class action pursuant to
DISCUSSION
Plaintiff contends that when she was paid only the balance of her cash balance account, she received less than the law requires. The Plan responds that when plaintiff received her cash account balance, she received all that she was promised under the express terms of the Plan. It argues that she had the benefit of her bargain and now opportunistically seeks a “windfall” at the expense of other Plan participants. Further, the Plan argues for the first time on appeal that the regulations under I.R.C. sections 411 and 417 are unreasonable in that they go beyond the plain meaning of the statutes. Lastly, the Plan argues that it is entitled to rely on the favorable determination letters issued by the IRS in 1990 and 1995.
We agree with Plaintiff. The Plan does not comply with the statutory and regulatory requirements, or with their authoritative interpretation issued by the IRS. We conclude, furthermore, that the IRS‘s interpretation of how the existing regulations apply to cash balance plans is reasonable and consistent.
A. The manner in which the plan calculated the value of Esden‘s lump-sum distribution did not comply with the statutory and regulatory requirements.
1. Lump-sum distributions of accrued benefits must be the actuarial equivalent of the normal retirement benefit calculated according to a methodology prescribed by the regulations.
The Plan is a defined benefit plan, see
This rule that regardless of any option as to timing or form of distribution, a vested participant in a defined benefit plan must receive a benefit that is the actuarial equivalent of her normal retirement benefit (that is, the accrued benefit expressed as an annuity beginning at normal retirement age) has been repeatedly recognized by courts. See, e.g., McDaniel v. The Chevron Corporation, 203 F.3d 1099, 1120 (9th Cir. 2000) (stating that ERISA requires that lump sum benefit must be actuarial equivalent of amount or benefit that would commence at normal retirement age); Spacek v. Maritime Assoc., I L A Pension Plan, 134 F.3d 283, 290 (5th Cir. 1998) (recognizing “general rule that, where an employee‘s pension benefit commences at a time other than normal retirement age, the accrued portion of such a benefit is the actuarial equivalent of the retirement benefit available at normal retirement age“); Costantino v. TRW, Inc., 773 F. Supp. 34, 41 (N.D. Ohio 1991) (“‘[A]ccrued benefit’ can best be defined as the actuarial equivalent of the annual benefit commencing at normal retirement age“), aff‘d in part, 13 F.3d 969 (6th Cir. 1994); cf. Myers-Garrison v. Johnson & Johnson, 210 F.3d 425, 430 (5th Cir. 2000) (“[The
Nor, before this appeal, has the defendant Plan disputed either the requirements of this regulatory framework, or that those requirements apply to it because it is a defined benefit plan. In a letter denying Esden‘s administrative request for additional benefits, the Plan‘s manager conceded, “You are correct in your assertion that a lump sum payable under a cash balance plan can be no less than the present value of the normal retirement benefit.” In his sworn affidavit, the Plan‘s own expert affirmed that “[d]efined benefit plans that offer lump sums are required to provide a lump sum amount that is not less than the present value of an annuity at normal retirement utilizing interest rates specified by law.” Bernier Aff. ¶ 6. Lastly, the structure of the Plan itself, which as we have seen defines Accrued Amount as the Current Cash Balance Annuity, calculated as of normal retirement age, is drafted to comply with these regulatory requirements.12
Because the Plan is a defined benefit plan, any distribution from the plan must be the actuarial equivalent of the accrued benefit expressed as an annual benefit payable at normal retirement age, that is—otherwise expressed—the normal retirement benefit.
For the purposes of this rule, the regulations do not leave a plan free to chose its own methodology for determining the actuarial equivalent of the accrued benefit expressed as an annuity payable at normal retirement age. If plans were free to determine their own assumptions and methodology, they could effectively eviscerate the protections provided by ERISA‘s requirement of “actuarial equivalence.” See, e.g., H.R. Rep. No. 103-632, pt. 2, at 57 (1994) (“If plans could use high [discount] rates, plans could lower the single sum paid to participants.“). To comply with ERISA, as well as to be considered a qualified plan under the Code, a plan must comply with specified valuation rules and certain consent rules. See
Distribution valuation requirements. In determining the present value of any distribution of any accrued benefit from a defined benefit plan, the plan must take into account specified valuation rules. For this purpose, the valuation rules are the same valuation rules for valuing distributions as set forth in section 417(e); see § 1.417(e)-1(d). . . . This paragraph also applies whether or not the participant‘s consent is required under paragraphs (b) and (c) of this section.
The cross-referenced Code section 417(e) requires that the accrued benefit be discounted back to present value at the “applicable interest rate.”
For purposes of determining the present value of any accrued benefit and for purposes of determining the amount . . . of any distribution including a single sum, a defined benefit plan is subject to the [Section 417 applicable interest rate] . . .. The present value of any optional form of benefit cannot be less than the present value of the normal retirement benefit determined in accordance with this paragraph.
The application of these lump-sum valuation rules to a conventional final-pay formula defined benefit plan is uncontroversial. See, e.g., Costantino, 13 F.3d at 972 (explaining discounting of stream of annuity payments to lump-sum equivalent). Because such plans define the benefit in annuity form as a function of the participant‘s final salary, they already express the benefit annuity at normal retirement age. The valuation rules under Treasury Regulations sections 1.411(a)-11(d) and 1.417(e)-1(d)(1) require this annuity to be discounted to a present value lump sum by applying the statutorily required discount rate and mortality tables.14
The issue presented by this case is how these regulations should be applied to cash balance plans, which express the employee‘s benefit in terms of a current hypothetical account balance (together with the accrued right to receive future interest credits) rather than as a function of the participant‘s final salary. On this issue we find that the IRS has provided consistent guidance, as we set out below.
2. The regulations applied to cash balance plans: the significance of Notice 96-8, 1996-1 C.B. 359
Notice 96-8, 1996-1 C.B. 359, released on January 18, 1996, provides guidance on the applicability of Code sections 411(a) and 417(e) to lump-sum distributions from cash balance plans. The Notice confirms that in order to comply with sections 411(a) and 417(e), when calculating a lump-sum distribution, a cash balance plan must project the balance of the hypothetical account forward to normal retirement age and then pay out the present value of that projected balance, computed according to section 417(e). See 1996-1 C.B. at 359. This dispute arises over the projection rate used by the Plan in applying this framework.
The Notice also directly confronts the problem of “whipsaw.” It explains the twin violations that a plan must avoid in complying with statutory valuation requirements when the plan provides for interest credits that exceed the statutory discount rate. Under these conditions, payment of only the cash account balance will no longer constitute a complete distribution of the actuarial equivalent of the employee‘s accrued benefit. Necessarily, as a matter of mathematics, a distribution of only the account balance will involve one of two violations. Either the plan must have employed a discount rate equal to the interest credit rate, and by hypothesis in excess of the prescribed “applicable rate,” in violation of Code section 417(e) and ERISA section 205(g); or the plan must have projected the cash account balance forward at a rate less than the interest credits provided under the plan, thereby working a forfeiture under Code section 411(a)(2) and ERISA § 203(a)(2). See 1996-1 C.B. at 359-60. As set out below, we conclude that the Plan in this case worked just such a forfeiture.15
The Notice specifically addresses the problem of cash balance plans where the interest credits are tied to a variable outside index. See
The Notice confirms that the benefits attributable to interest credits are accrued benefits, as that term is defined by Treasury Regulation § 1.411(a)-7(a). As a consequence, once they have accrued—provided that they have vested according to
that in determining the amount of an employee‘s accrued benefit, a forfeiture, within the meaning of § 1.411(a)-4T, will result if the value of future interest credits is projected using a rate that understates the value of those credits or if the plan by its terms reduces the interest rate or rate of return used for projecting future interest credits.
For purposes of section 411 and the regulations thereunder, a right to an accrued benefit is considered to be unforfeitable at a particular time if, at that time and thereafter, it is an unconditional right. . . . [A] right which, at a particular time, is conditioned under the plan upon a subsequent event, subsequent performance, or subsequent forbearance which will cause the loss of such right is a forfeitable right at that time.
Here, by fixing the future interest credits at 4.0% for the purposes of projection—a full 1.5% less than the guaranteed minimum actual value of those credits—the Plan effects just such a forfeiture. In effect, the Plan conditions the right to receive the additional 1.5% interest on the form of distribution that the participant elects. What the Plan consistently characterized in the proceedings below as an innocuous “interim calculation” is exactly what the IRS interprets the regulations to forbid.18
* * *
Based on the foregoing construction of how the existing statutes and regulations apply to lump-sum distributions from cash balance plans we conclude: (1) in paying Esden her Cash Balance Account, the Plan did not pay her the actuarial equivalent of her normal retirement benefit (that is, her accrued benefit expressed as an annuity commencing at normal retirement age), in violation of
B. Notice 96-8 represents the “fair and considered” position of the IRS and sets out a reasonable interpretation of the law as it applied at the time of Esden‘s termination.
Notice 96-8‘s interpretation of how the existing regulatory scheme applies to cash balance plans represents the fair and considered judgment of the IRS and as such is entitled to deference. Further, we conclude that enforcing this regulatory scheme raises no problem of retroactivity, notwithstanding that the Notice was published after Esden‘s distribution in 1991. Lastly, we reject the Plan‘s contention that Notice 96-8 expressly grandfathers its conduct, immunizing it from a participant‘s suit under ERISA.
1. The IRS‘s interpretation of its own regulations is entitled to deference.
It is well-settled that “an agency‘s reasonable, consistently held interpretation of its own regulation is entitled to deference.” I.N.S. v. National Ctr. for Immigrants’ Rights, Inc., 502 U.S. 183, 189-90 (1991). “[P]rovided an agency‘s interpretation of its own regulations does not violate the Constitution or a federal statute, it must be given ‘controlling weight unless it is plainly erroneous or inconsistent with the regulation.‘” Stinson v. United States, 508 U.S. 36, 45 (1993) (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)); see also Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (stating that courts “must defer to the [agency‘s] interpretation unless an ‘alternative reading is compelled by the regulation‘s plain language or by other indications of the [agency‘s] intent at the time of the regulation‘s promulgation‘“) (quoting Gardebring v. Jenkins, 485 U.S. 415, 430 (1988)); 1 Kenneth C. Davis & Richard J. Pierce, Jr., Administrative Law Treatise § 6.10, at 281 83 (3d ed. 1994). Here, the district court apparently disregarded the IRS‘s interpretation of how the regulations promulgated under Code sections 411(a) and 417(e)—and the parallel provisions under ERISA sections 203(e) and 205(g)—apply to cash balance benefit plans. In effect, the district court enforced the terms of the Plan rather than the requirements of the regulations.
The district court stated that “[w]ith the exception of favorable determination letters issued on a case-by-case basis, the IRS has not yet issued any definitive interpretation nor adopted any definitive regulations to govern the administration of this type of defined benefit plan.” Esden II, No. 2: 97-cv-114, at 6. This overlooked not only Notice 96-8, but also a set of final regulations that the IRS has issued, after notice and comment rule-making procedures, addressing cash balance plans and how they are to be valued.
These regulations establish valuation safe harbors for cash balance plans under the so-called “cross-testing” rules deployed to test whether a plan impermissibly discriminates in favor of highly-compensated employees. See
Comments on the September 1991 regulations expressed concern that the safe harbor plan design requirements reflected an interpretation by the Service and Treasury of the qualification requirements [i.e. existing law] that, in certain cases, would require cash balance plans to pay a single sum distribution in excess of the hypothetical account balance.
Under the safe harbor regulations, the basis for the valuation is the projected hypothetical account as of normal retirement age. Treasury Regulation section 1.401(a)(4)-8(c)(3)(ii) provides that:
The plan must provide that an employee‘s accrued benefit under the plan as of any date is an annuity that is the actuarial equivalent of the employee‘s projected hypothetical account as of normal retirement age, determined in accordance with paragraph (c)(3)(vi) of this section.
In turn, paragraph (c)(3)(vi)(A) provides:
The plan must provide that at any date at or before normal retirement age the accrued benefit (within the meaning of section 411(a)(7)(A)(i)) of each employee in the plan is an annuity commencing at normal retirement age that is the actuarial equivalent of the employee‘s hypothetical account as of normal retirement age (as determined under paragraph (c)(3)(v)(B) of this section.)
And that cross-referenced paragraph in turn requires:
Under paragraph (c)(3)(vi) of this section, the value of an employee‘s hypothetical account must be determined as of normal retirement age in order to determine the employee‘s accrued benefit as of any date at or before normal retirement age.
Furthermore, the safe harbor regulations are consistent with Notice 96-8 in determining how the cash balance at normal retirement age is to be projected. The cash balance plan‘s benefit formula must provide that each account is automatically credited with a qualifying interest rate that precludes forfeiture.
This requirement is not satisfied if any portion of the interest adjustments to a hypothetical allocation are contingent on the employee‘s satisfaction of any requirement. Thus, for example, the interest adjustments to a hypothetical allocation [i.e., a cash balance account] must be provided through normal retirement age, even though the employee terminates employment or commences benefits before that age.
Finally, in general, for the purposes of testing under these safe harbor regulations, a plan may determine actuarial equivalence by using a standard mortality table and an interest rate equal to the interest rate specified in the plan for making interest adjustments to the cash balance. See
Rather than referring to the final regulations (
2. Notice 96-8 interprets the law as it applied at the time of Esden‘s termination.
The Plan contends that following Notice 96-8 improperly subjects the Plan to a retrospective application of a subsequent interpretation. We disagree. Because Notice 96-8 is an authoritative interpretation of existing statutes and regulations, we hold that it is valid guidance on the law as it applied at the time of Esden‘s lump-sum distribution. Cf. Chock Full O’ Nuts Corp. v. United States, 453 F.2d 300, 303 (2d Cir. 1971) (“To the extent that a regulation interprets or elucidates the meaning of a statute, it is merely explanatory or confirmatory rather than retroactive.”21); see also Dickman v. Commissioner, 465 U.S. 330, 343 (1984) (Commissioner may change an earlier interpretation of the law when he concludes that his previous interpretation was erroneous, notwithstanding taxpayer reliance) (citing Dixon v. United States, 381 U.S. 68, 72-75 (1965)).22
3. The Plan mischaracterizes the significance and effect of Notice 96-8
Recognizing that Notice 96-8 fully supports plaintiff‘s position, the Plan seeks to minimize its significance, arguing that the Notice was published for discussion in advance of publishing proposed regulations. It therefore contends that Esden may not rely on the Notice “to enforce a personal right to more Plan benefits under ERISA.” Appellee Br. at 38-39. Further, it contends that even were Notice 96-8 held to be a valid interpretation of the law, it expressly “grandfathers” plans that have made lump-sum distributions “based on reasonable, good-faith interpretation of the applicable provisions of the Code.” 1996-1 C.B. at 363. We disagree.
Second, even if the Plan could show that it had adopted a “reasonable, good-faith interpretation of the applicable provisions of the Code,”
Finally, even if we were to disregard Notice 96-8, we would reach the same result, as explained above, on the basis of the governing statutes and regulations. The Plan was drafted to accomplish what the statutes and regulations forbid.
C. Arguments that Esden received the benefit of her bargain, or that she chose to forfeit a portion of her future interest credits are without merit.
Defendant correctly states that “[t]here is no dispute that the benefit each participant received from the Plan was exactly what he or she was promised.” Appellee Br. at 11. The district court also relied on this reasoning. See Esden I, 182 F.R.D. at 438 (“Using a 4% rate to project future interest credits ensures that the Cash Balance Account does what it promises to do . . . .“). But whether Esden received what the Plan promised is not the issue. The issue is whether the Plan‘s terms complied with the law. They did not.
ERISA was enacted to restrict employers’ and employees’ freedom of contract when bargaining over pensions. Employers do not have to provide pension plans, but when they do, those plans must comply with Title I of ERISA.23 See
We find similarly unpersuasive the district court‘s explanation that the Plan did not cause Esden to “forfeit her right to earn future interest credits; Esden herself made that decision.” Esden II, No. 2: 97-cv-114, at 6. A participant may not elect a forfeiture. The anti-forfeiture provisions of ERISA are drafted as mandatory terms. See, e.g.,
The Plan‘s next argument on this appeal is that the regulations prescribing the valuation methodology exceed the scope of the statute. Defendant contends that “[t]he only provisions dealing with the determination of lump sum amounts under the statutes when Esden received her benefit, were limited by their terms to contexts in which consent was required to ‘cash out’ a benefit.” Relying on arguments set out in Lyons v. Georgia -Pacific Corp. Salaried Employees Retirement Plan, 66 F. Supp. 2d 1328 (N.D. Ga. 1999), the Plan suggests that insofar as the valuation regulations are applied for purposes other than determining whether a lump-sum distribution requires a participant‘s consent, they are invalid under a Chevron analysis. We reject this argument for two reasons. First, it fails on its merits. Accord Lyons, 221 F.3d at 1244-49. Second, even if the argument were persuasive, it would not help this Plan, in this case. The Plan‘s terms expressly contract for the valuation framework it now seeks to disavow.
In Lyons, the court addressed a claim similar to Esden‘s, brought by a participant in a cash balance plan. Jerry Lyons alleged that the lump-sum distribution he received, in an amount equal to the balance of his cash balance account ($36,109.15), was less than the present value of his normal retirement benefit properly calculated under the regulations ($49,341.83). See 66 F. Supp. 2d at 1332. The Lyons court correctly analyzed the controlling regulations and conceded that Notice 96-8 required the calculations that Lyons alleged. See id. at 1332 n.4. Notwithstanding this regulatory framework, the Lyons court refused to countenance what it considered to be a “computational contrivance that has only slight connection to economic reality.” Id. at 1336. It therefore found that the valuation regulations were an unreasonable interpretation of
The Lyons court found
We do not agree.
Here, the statute is ambiguous. While
In prescribing the statutory discount rates,
Further, the legislative history accompanying the Tax Reform Act of 1986, which introduced these consent and valuation restrictions, evidences a congressional intent to apply these valuation rules to all distributions. See H.R. Conf. Rep. No. 99-841, pt. 2, at 488 (1986), reprinted in 1986-3 C.B. Vol. 4 at 488 (using an illustrative example of an employee with a $50,000 accrued benefit). And, in 1994, when Congress amended these provisions to replace the PBGC rate with the 30-year long-bond rate, it explained again its intention:
Congress adopted the interest rate cap to prevent plans from using unreasonably high interest rates to determine the present value of participants’ benefits. If plans could use high interest rates, plans could lower the single sum paid to participants.
H.R. Rep. No. 103-632, pt. 2, at 57 (1994) (emphasis added) reprinted in 1994. If there were no regulation of the discount rates that plans could use in calculating lump sum equivalents of accrued normal retirement benefits, they could eviscerate the protective provisions of ERISA.
We conclude that the valuation rules applying the statutory “applicable interest rate” to all distributions, regardless of consent, see, e.g.,
Even if the regulations were invalid as beyond the scope of the statute, that would not alter the outcome of this case. By its own terms, at the time of Esden‘s distribution, the Plan provides that the “Actuarial Equivalent” of any benefit will be determined by applying the “PBGC interest rate structure for deferred annuities.” By contract, the Plan expressly adopted the applicable rate then prescribed by the statutes and regulations.
We conclude that there is no merit to the argument that the regulations are invalid.
E. The favorable determination letters cannot be relied on as proof that the IRS has ruled that the Plan complied with ERISA.
Finally, the Plan argues that the only “pertinent guidance” that the IRS has issued with respect to the Plan is to issue the two favorable determination letters. The Plan contends that because these letters are “a construction and application of the regulations by the administrative agency charged with their enforcement . . . [they] are entitled to great weight.” The district court, while denying that the determination letters were “outcome determinative” considered that they were “entitled to at least the weight accorded other expert testimony.” Esden I, 182 F.R.D. at 439. We disagree.
First, we repeat that the determination letters are not the only “pertinent guidance” that the IRS has issued. This assertion disregards the “guidance” provided by the safe harbor regulations and Notice 96-8 itself.
Second, private letter rulings are of limited evidentiary weight. The Code expressly provides that “a written determination may not be used or cited as precedent.”
In Amato, the IRS considered the legality of a plan amendment; it applied rules clearly established in its regulations and revenue rulings and determined that the plan no longer qualified under
A determination letter can only ever apply the law to the particular factual record presented by the applicant. Here, in 1990 when the IRS first reviewed the Plan‘s conversion to a cash balance format, the key district director specifically asked for a demonstration of how the Plan‘s benefit formula “meets the requirements of the IRS Code Sect. 411(b)(1) (Accrual Rules).” The Plan‘s actuary demonstrated this compliance in an analysis that assumed a 5.5% minimum Interest Credit, but nowhere documented that assumption. In the same submission, the Plan purported to show compliance with
Finally, the Plan‘s reliance on determination letters cannot shield it from liability in a suit brought by a plan participant for violations of ERISA. Accord Lyons, 221 F.3d at 1252-53. A favorable determination letter indicates only that an employee retirement plan qualifies for favorable tax treatment by meeting the formal requirements of
It could not be otherwise. In enacting ERISA, Congress expressly recognized the limited protection that the previous regulatory regime had provided for pension participants. That regulatory scheme had relied solely on the tax incentives provided to qualified plans and the IRS‘s power to disqualify noncompliant plans. See, e.g., H.R. Rep. No. 93-533 (1974) reprinted in 1974 U.S.C.C.A.N. 4639, 4642 (“The Internal Revenue Code provides only limited safeguards for the security of anticipated benefit rights in private plans since its primary functions are designed to produce revenue and to prevent evasion of tax obligations.“). Under ERISA, to correct this lack of safeguards, Congress created substantive rights for pension plan participants and expressly created private causes of action in federal court to vindicate those rights. See
CONCLUSION
For the foregoing reasons the judgment of the district court is REVERSED and the case is REMANDED for further proceedings to calculate class damages. It shall be for the district court in the first instance to determine the proper projection rate for the calculation of damages, provided only that in no event may that projection rate be less than the minimum 5.5% guaranteed under the terms of the plan.