October 12, 2015
Authored by: Richard Arenburg
A recent case from a federal court in the Northern District of Georgia provides an interesting perspective on the termination of a nonqualified retirement plan with a traditional defined benefit formula offering lifetime annuity payments. In Taylor v. NCR Corporation et. al., NCR elected to terminate such a nonqualified retirement plan. The termination decision not only precluded new entrants to the plan and the cessation of benefit accruals for active employees, but it also affected retirees in payout status receiving lifetime payments. Those retirees received lump sum payments discounted to present value in lieu of the lifetime payments then being paid to them.
At the time NCR terminated the plan, its provisions apparently provided that the plan could be terminated at any time provided that “no such action shall adversely affect any Participant’s, former Participant’s or Spouse’s accrued benefits prior to such action under the Plan. . . ” The plaintiff was a retiree receiving a lifetime joint and survivor annuity of approximately $29,000 annually. As a result of the plan’s termination, NCR calculated a lump sum benefit for the plaintiff of approximately $441,000, with the plaintiff ultimately receiving a net payment of approximately $254,000 after federal and state income tax withholdings.
The key allegations made by the plaintiff, as recited by the court, were (1) that the lump sum payment caused the plaintiff to incur a significant taxable event and (2) that the plaintiff objected to the use of a discount factor to reduce the value of the lump sum payment being made to him.
The court rejected the first claim by citing widely established precedent that tax losses do not fall within the relief available under ERISA. The court also rejected the plaintiff’s complaint about the actuarial reduction, citing an Eleventh Circuit decision, Holloman v. Mail-Well Corp., in which the Eleventh Circuit seemed to conclude that the power to accelerate a stream of benefit payments necessarily included the ability to discount the value of those future payments to a present value lump sum.
The court faulted the plaintiff’s allegations for simply complaining about the use of an actuarial reduction. The court stated that the allegation “that the present value reduction factor decreased his further monthly payments as correct, but irrelevant” as a present value decrease of future payments was “precisely the purpose of applying a present value reduction factor.” Furthermore, the court said that the allegation that “the use of the present value reduction factor was, in itself, improper because it amounted to a reduction of his future monthly payments under the plan” was “incorrect as a matter of law.”
The most interesting aspect of this case is how willing the court was to read a broad grant of authority into a very simple and concise reservation of an employer’s right to terminate a nonqualified retirement plan. The court was willing to infer that the power to terminate necessarily includes the power to commute annuity payments to lump sums and to discount the value of those annuity payments using appropriate actuarial assumptions, including discount rates. This case did not survive NCR’s motion to dismiss. The court indicated that it may have at least survived that stage of the litigation had the plaintiff alleged that the actuarial assumptions used by NCR were improper, rather than simply complaining about the mere use of such factors.