Case Information
*2 Before: KEARSE, STRAUB, and POOLER, Circuit Judges .
Appeal from the decision and order of the United States District Court for the
Western District of New York (David G. Larimer,
J
.). This is our third decision in this
litigation for the recovery of benefits under Xerox Corporation’s retirement plan.
See
*3
Frommert v. Conkright
,
____________________ PETER K. STRIS, Stris & Maher LLP (Brendan Maher, on the brief ), Gardena, CA, for Plaintiffs-Appellants . MARGARET A. CLEMENS, ESQ., Littler Mendelson, P.C., Rochester, NY, for Defendants-Appellees .
EDWARD D. SIEGER, Senior Appellate Attorney (M. Patricia Smith, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor, Elizabeth Hopkins, Counsel for Appellate and Special Litigation, on the brief ), U.S. Department of Labor, Washington, D.C., for Amicus Curiae the Secretary of Labor, in support of Plaintiffs-Appellants .
Maria Ghazal, Business Roundtable, Washington, D.C.; Jeffrey A. Lamken, MoloLamken LLP, Washington, D.C.; Robin S. Conrad, Shane B. Kawka, National Chamber Litigation Center, Inc., Washington, D.C.; Janet M. Jacobson, American Benefits Council, Washington, D.C.; Scott J. Macey, Kathryn Ricard, The ERISA Industry Committee, Washington, D.C., for Amici Curiae Business Roundtable, Chamber of Commerce of the United States of America, The ERISA Industry Committee, and American Benefits Council, in support of Defendants-Appellees .
POOLER, Circuit Judge :
Plaintiffs-Appellants (“Plaintiffs”), who appeal from the December 14, 2011 order
of the Western District of New York (David G. Larimer,
J.
), have brought claims under
the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001
et
seq.
, against the Xerox Corporation (“Xerox”), the Xerox Retirement Income Guarantee
Plan (“the Xerox Plan” or “the Plan”), and individually named retirement plan
administrators (collectively, the “Plan Administrator”). This is our third decision in this
litigation.
See Frommert v. Conkright
,
BACKGROUND
We presume familiarity with the facts and procedural history of this case as set out
in our prior decisions,
see Frommert II
,
This litigation concerns the 1989 restatement of the Xerox Plan, a floor-offset
retirement plan. “A floor-offset plan uses a defined-benefit structure (with pension
payments linked to years of work and high salary) to buffer the uncertainty of a
*6
defined-contribution system (where pension payments depend on the performance of
investments in each employee’s account).”
White v. Sundstrand Corp.
,
Plaintiffs are Xerox employees who left the company but were subsequently
rehired, having received a lump-sum distribution of their then-accrued pension benefits
when they left. At issue in this case is how the prior lump-sump distribution affects the
determination of benefits outlined above, both in the comparison of the three accounts
and in the calculation of actual benefits. Prior to this litigation, the Xerox Plan used the
so-called phantom account offset method to take into account the lump-sum distribution.
See Frommert I
,
First, the present value of any of the employee’s accounts are calculated as if the lump sum had remained in the account and been invested throughout the period following distribution. Second, the current values of the CBRA and TRA that previously were distributed (i.e., the estimated values) are added to any actual amounts earned since the employee’s rehire date. Using these total amounts, a comparison is made among the three account values—RIGP, total CBRA, and total TRA—to determine which method yields the greatest benefits in a monthly value. Third, the account with the greatest monthly value is reduced by the current value of the employee’s prior distribution in that same account.
Id. (internal footnotes omitted). Because the RIGP benefit is determined by formula, without reference to an underlying account, no estimated value is added to RIGP in step 2. Id. at 260 n.5. However, if RIGP yields the greatest benefits in monthly value, it is reduced by the estimated increased value of the lump sum under either TRA or CBRA (whichever is higher), in step 3. Id. at 260 n.6. The employee received a monthly pension benefit equal to the reduced amount.
Plaintiffs brought suit under Section 502(a)(1)(B) of ERISA, which provides that a “civil action may be brought . . . by a participant or beneficiary . . . to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C.
§ 1132(a)(1)(B).
[2]
Plaintiffs argued that the use of the phantom account offset method to
take into account the prior lump-sum distribution was an improper interpretation of the
Plan and that, therefore, they were entitled to greater benefits. In
Frommert I
, we agreed
and vacated the district court’s grant of summary judgment.
Frommert I
,
We instructed the district court as follows:
On remand, the remedy crafted by the district court for those employees rehired prior to 1998 should utilize an appropriate pre-amendment calculation to determine their benefits. We recognize the difficulty that this task poses because of the ambiguous manner in which the pre-amendment terms of the Plan described how prior distributions were to be treated. As guidance for the district court, we suggest that it may wish to employ *11 equitable principles when determining the appropriate calculation and fashioning the appropriate remedy.
Id.
at 268. On remand, the district court used as an offset the nominal value of the prior
lump-sum distribution.
Frommert v. Conkright
,
In adopting this
Layaou
offset—so-named because the same offset was used in an
earlier decision interpreting the Xerox Plan,
see Layaou
,
The district court applied Firestone deference and adopted the offset method proposed by the Plan Administrator, which converts the prior lump-sum distribution into an annuity using a benchmark interest rate, [7] decreases RIGP by this converted value, and then compares the monthly values of the three components. [8] Frommert , 825 F. Supp. 2d at 438-40. The district court rejected Plaintiffs’ argument that the Plan Administrator’s proposed offset violated ERISA’s notice provisions and further rejected their request for additional discovery to determine whether the Plan Administrator was operating under a conflict of interest. Id. at 444-48. Plaintiffs now appeal, joined by the Secretary of Labor (the “Government”) as amicus curiae. [9]
DISCUSSION
Plaintiffs and the Government make three arguments on appeal. First, they argue that the Plan Administrator’s offset method violates ERISA’s notice provisions. Second, they argue that the offset method is not a reasonable interpretation of the Plan under Firestone deference. Finally, they argue that the district court erred in failing to permit *13 Plaintiffs to conduct discovery concerning whether the Plan Administrator was operating under a conflict of interest.
We pause to note that the posture of this litigation after
Frommert I
requires us to
interpret the Xerox Plan anew. As Defendants pointed out before the Supreme Court,
“the newly-framed question of how the offset should be applied based on the
‘pre-amendment plan terms’ arose for the first time on remand” out of
Frommert I
. Brief
for the Petitioners at 51,
Conkright v. Frommert
,
Upon review, we hold that the proposed offset is an unreasonable interpretation of the retirement plan and further hold that it violates ERISA’s notice provisions, but we affirm the district court’s decision to deny Plaintiffs’ request for additional discovery. I. Reasonable Interpretation
Plaintiffs argue that the Plan Administrator’s offset approach was an unreasonable
interpretation of the Xerox Plan. The district court reviewed the offset under
Firestone
deference and held that it was reasonable.
Frommert
,
As discussed above, the offset approach proposed by the Plan Administrator converts the prior lump-sum distribution into an annuity using a chosen interest rate (based on rates set by the PBGC), decreases RIGP by this converted value, and then compares the monthly values of the three components, CBRA, TRA, and RIGP. Section 9.6 of the Plan provides, in relevant part:
Section 9.6. Nonduplication of Benefits. In the event any part of or all of a Member’s accrued benefit is distributed to him prior to his Normal Retirement Date, if . . . such Member at any time thereafter recommences active participation in the Plan, the accrued benefit of such Member based on all Years of Participation shall be offset by the accrued benefit attributable to such distribution.
Section 1.1 of the plan defines “accrued benefit” as “[t]he normal retirement benefit which a Member has earned up to any date, and which is payable at Normal Retirement Date in an amount computed in accordance with Section . . . 4.3.” Section 4.3 describes the three components of the Xerox Plan. Sections 4.3(e) and (f) provide that the balances in the CBRA and TRA are converted into annuities “using annuity rates established by the PBGC.” Defendants argue and the district court held that the proposed offset approach is a reasonable interpretation of these provisions. Specifically, Defendants argue that, because Section 9.6 provides that a beneficiary’s benefits must be offset by “accrued benefits,” the RIGP benefit must be reduced by the amount of the prior lump- sum distribution. Because RIGP is expressed in the form of an annuity, the lump-sum distribution must be converted into an “actuarially equivalent” annuity before making the offset. Finally, because Section 1.1 defines “accrued benefits” with reference to Section 4.3, the appropriate rates for use in making this conversion are those provided in Section 4.3.
We hold this is unreasonable because it makes the rehired employees worse off under the Plan in terms of actual benefits received. These changes are relative to the treatment of newly hired Xerox employees with benefits determined under Section 4.3 of *16 the Plan. Consider the following example:
Employee 1 works at Xerox from 1960 to 1970, leaves the company, is rehired in 1980 and continues working at the company until 2005.
Employee 2 is newly hired by Xerox in 1980 and continues working at the company until 2005. The employees have equivalent highest average salaries.
Under the Plan Administrator’s approach, Employee 2’s RIGP benefit is determined
under the RIGP formula, using the highest average salary and 25 years of service.
Employee 1’s RIGP benefit is determined under the RIGP formula, using the same
highest average salary and 35 years of service, and then reduced by the “actuarially
equivalent” annuity value of the prior lump-sum distribution. Employee 1’s RIGP benefit
will be
less than
Employee 2’s benefit. This reduction changes the risk calculus under the
plan, as it affects the comparison of the three components. In circumstances where the
market has not performed well, the rehired employee is therefore less likely to receive the
RIGP benefit and bears more of the market risk inherent in defined contribution accounts.
Cf. CIGNA Corp. v. Amara
,
To be clear, ERISA plans may be constructed to change the risk borne by rehired employees or reduce such employees’ benefits in a manner that treats them worse than *17 newly hired employees, provided that such terms exist in the plan. They do not exist here. The newly hired employee’s benefits are determined under Section 4.3. We fail to see how an offset that purports to calculate “accrued benefits” under that section would treat rehired employees and newly hired employees differently. Sections 4.3(e) and (f) provide interest rates for use in converting CBRA and TRA into annuities, not for determining the accrued benefit under RIGP. No provision in the Xerox Plan defines the offset in accordance with the method the Plan Administrator advocates, and Section 4.3 defines the RIGP “accrued benefit” only with reference to the RIGP formula. Accordingly, we find that the proposed offset produces an absurd and contradictory result and is therefore unreasonable.
II. Notice
We now consider, assuming
arguendo
that the Plan Administrator’s offset method
was a reasonable interpretation of the Xerox Plan, whether the offset violated ERISA’s
notice requirements and therefore cannot be applied to the Plaintiffs’ benefits. The
Supreme Court expressly declined to reach this argument,
Conkright
,
SPDs are central to ERISA. Section 104(b) of ERISA requires plan administrators
to regularly furnish SPDs to plan beneficiaries. 29 U.S.C. § 1024. We have recognized
“ERISA’s purpose of ensuring adequate disclosure with respect to pension and welfare
plans.”
Wilkins v. Mason Tenders Dist. Council Pension Fund
,
ERISA and its regulations mandate what information administrators must include
in an SPD. 29 U.S.C. § 1022 (specifying required information for SPDs);
see also
29
C.F.R. § 2520.102-2 (specifying requirements for SPD style and formatting); 29 C.F.R. §
2520.102-3 (specifying requirements for SPD contents). SPDs must detail the
“circumstances which may result in disqualification, ineligibility, or denial or loss of
benefits,” and “shall be written in a manner calculated to be understood by the average
plan participant, and shall be sufficiently accurate and comprehensive to reasonably
apprise such participants and beneficiaries of their rights and obligations under the plan.”
29 U.S.C. § 1022. “In fulfilling [the statutory notice] requirements, the plan administrator
shall exercise considered judgment and discretion by taking into account such factors as
*19
the level of comprehension and education of typical participants in the plan and the
complexity of the terms of the plan.” 29 C.F.R. § 2520.102-2(a). SPDs must include
statements “clearly identifying circumstances which may result in . . .
offset
. . . of any
benefits that a participant or beneficiary might otherwise reasonably expect the plan to
provide.”
Id.
§ 2520.102-3(
l
) (emphasis added). In order to comply with Section 102 of
ERISA, an SPD must explain the “full import” of a plan term.
Layaou
,
For purposes of our notice analysis, we assume arguendo that the Xerox Plan is reasonably interpreted by the Plan Administrator to include the current proposed offset method. Section 9.6 of the Xerox Plan provides that “the accrued benefit of [a beneficiary] based on all Years of Participation shall be offset by the accrued benefit attributable to [any past] distribution.” The Plan’s SPDs state that “[t]he amount [a beneficiary] receive[s] may also be reduced if [the beneficiary] had previously left the Company and received a distribution at that time.” Appendix 694 (emphasis added); see also Appendix 534. Comparing the Plan and its SPDs, we find that the SPDs fail to clearly identify the circumstances that will result in an offset, are insufficiently accurate and comprehensive, and fail to explain the “full import” of Section 9.6 of the Plan. Accordingly, we hold that the Plan violates ERISA’s notice provisions.
We make our holding for several reasons. First and foremost, the SPDs do not state that the amount of the lump-sum distribution will reduce the RIGP benefit, stating only that it “may” result in a reduction. This is a critical omission because RIGP is a *20 formula and not an account (like CBRA and TRA). We do not see how a beneficiary would know, given the SPDs’ use of the word “may,” that a prior distribution from an account would reduce his benefit under a formula unless the SPD made clear the interaction between the two. Thus, any interpretation of the Plan that necessarily reduces the RIGP benefit would violate ERISA’s notice requirements.
Second and relatedly, even assuming that the SPDs prescribe an offset to RIGP, the SPDs fail to describe the mechanics of any offset. Specifically, the SPDs fail to state the interest rate to be used to make the actuarial equivalence. A higher interest rate would lead to a much larger offset than a lower one, leading to a correspondingly greater reduction of benefits. The SPDs are therefore insufficiently accurate and comprehensive.
Defendants raise several counter-arguments as to why there is no notice violation,
each of which is unavailing. First, Defendants argue that finding a notice violation in this
case would conflict with our holding in
McCarthy v. Dun & Bradstreet Corporation
,
where we declined to “impose[] a blanket requirement under which a[n SPD] invariably
must describe the method of calculating an actuarial reduction or must use a clarifying
example to illustrate how a benefit is actuarially reduced when a participant who has
vested rights to receive a particular plan benefit chooses to receive payments before
reaching normal retirement age.”
Second, Defendants argue that our holding runs the risk of making future SPDs
unreadable. While it may be the case that “[l]arding [an SPD] with minutiae would defeat
that document’s function: to provide a capsule guide in simple language for employees,”
Herrmann v. Cencom Cable Assocs.
,
Finally, the district court, in its analysis of ERISA’s notice requirements on our remand following the Supreme Court’s decision in Conkright , stated that
[i]n contrast to the Administrator’s proposal, then, plaintiffs’ suggestion that this Court should not apply any appreciated offset is, in light of the Supreme Court’s decision in this case, un reasonable. In effect, plaintiffs would have this Court do exactly what it did before, i.e. , to adopt an approach under which plaintiffs’ “present benefits [would be] reduced only by the nominal amount of their past distributions—thereby treating a dollar distributed to [plaintiffs] in the 1980’s as equal in value to a dollar distributed today.” The Supreme Court expressly rejected that approach, and I decline to adopt it again.
*23 III. Harm and Remedies
We have concluded that the Plan Administrator’s offset approach is an unreasonable interpretation of the Xerox Plan and further concluded that the Plan and its related SPDs violate ERISA’s notice provisions. We turn now to a consideration of the appropriate remedy. While we remand to the district court to determine the remedy in the first instance, we pause to discuss the parameters that should guide its decisionmaking.
Plaintiffs’ notice claims fall under Section 502(a)(3), 29 U.S.C. § 1132(a)(3),
under which the district court may invoke its equitable powers.
Amara
,
We have previously held that, for claims of ERISA notice violations, plaintiffs
need to satisfy a standard of “likely prejudice.”
Burke v. Kodak Ret. Income Plan
, 336
F.3d 103, 113 (2d Cir. 2003). The Supreme Court has since clarified that the standard of
harm that plaintiffs must show depends upon the equitable remedy that plaintiffs seek.
See Amara
,
If the district court holds that the Plan’s notice violations justify the imposition of
an equitable remedy, such a remedy will provide the relief that Plaintiffs seek. However,
if it finds that no equitable remedy is available, it should separately consider Plaintiffs’
unreasonable-interpretation claim, under which the appropriate remedy is to enforce the
terms of the Xerox Plan. 29 U.S.C. § 1132(a)(1)(B);
Amara
,
Finally, Plaintiffs argue that the district court erred in failing to permit them to
conduct discovery concerning whether the Plan Administrator is operating under a
conflict of interest.
See Frommert
,
Plaintiffs argue that, based on
Metropolitan Life Insurance Company v. Glenn
, 554
U.S. 105 (2008), the district court should permit them to conduct additional discovery as
to whether the Plan Administrator here is operating under a conflict of interest. In
Glenn
,
which was issued after discovery in this litigation, the Supreme Court held that “the fact
that a plan administrator both evaluates claims for benefits and pays benefits claims
creates the kind of ‘conflict of interest’” that “must be weighed as a ‘factor in determining
whether there is an abuse of discretion’” under
Firestone
.
Id.
at 111-12 (emphasis
*25
omitted) (quoting
Firestone
,
CONCLUSION
For the foregoing reasons, we VACATE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.
Notes
[1] The formula takes 1.4% of the participant’s highest average yearly pay, based on the participant’s five highest-paying calendar years, and multiplies it by the participant’s years of service, up to 30.
[2] Plaintiffs also brought suit under Section 502(a)(3), which provides, in part, that
a “civil action may be brought . . . by a participant or beneficiary . . . to obtain other
appropriate equitable relief (i) to redress [ERISA] violations or (ii) to enforce any
provisions of [ERISA] or the terms of the plan.” 29 U.S.C. § 1132(a)(3). We affirmed
the district court’s dismissal of this claim with respect to payment of benefits, “[b]ecause
adequate relief [was] available under [Section 502(a)(1)(B)].”
Frommert I
,
[3] Thus, two SPD requirements under our ERISA case law are: (1) plan administrators must provide SPDs to plan participants during the ordinary administration of a plan, as required by the statute, see 29 U.S.C. § 1022, and (2) plan administrators must provide SPDs to plan participants in order to validly amend the plan.
[4] Specifically, we held that an SPD, 1995 Xerox Plan Benefits Update, was
insufficiently accurate under Section 102 of ERISA, and that the Update violated then-
existing Section 204(h) of ERISA, which required plan administrators to provide fifteen
days notice of any amendment creating “a significant reduction in the rate of future
benefit accrual.”
Frommert I
,
[5] Section 204(g) provides “[t]he accrued benefit of a participant under a plan may not be decreased by an amendment of the plan, other than an amendment described in section 1082(d)(2) or 1441 of this title.” 29 U.S.C. § 1054(g)(1).
[6] We examined the use of the phantom account offset under both standards because
our holding in
Frommert I
required an interpretation of both the Plan and its SPDs, 433
F.3d at 265-66, and it is an open question whether
Firestone
deference is applicable to a
plan administrator’s interpretation of SPDs,
Layaou
,
[7] The Plan Administrator proposed using discount rates set by the the Pension Benefit Guaranty Corporation (“PBGC”) to make the conversion, capped at 8.5% compounded annually.
[8] This new approach thus differs from the phantom offset method in two ways. First, it uses a benchmark interest rate to convert the value of the prior lump-sum distribution rather than increasing the distribution by the hypothetical gain of the lump sum had it remained in the CBRA or TRA accounts. Second, it decreases the value of RIGP before comparing the three components, rather than first increasing the values of CBRA and TRA.
[9] The Business Roundtable, Chamber of Commerce of the United States of America, ERISA Industry Committee, and American Benefits Council have filed an amicus brief in favor of Defendants.
[10] We must also consider whether Plaintiffs meet the applicable standard of harm.
See Tocker
,
[11] Defendants also rely on the Tenth Circuit’s decision in
Stamper v. Total
Petroleum, Inc. Retirement Plan
, which held that when an SPD is silent about actuarial
assumptions but does not contradict the retirement plan, the plan controls.
[12] We held the 1998 SPD to be inapplicable to the Plaintiffs here because it was untimely, not because it was insufficiently comprehensive. See supra note 4.
[13] The district court implies that the Supreme Court decided the issue of notice on
the merits, something that it expressly declined to do.
Conkright
,