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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
from Spencer’s Benefits Reports: An employer committed an “egregious” failure to comply with the notice requirements of ERISA Sec. 204(h) when it converted its traditional defined benefit plan into a pension equity plan. This was the ruling of the Fourth Circuit U.S. Court of Appeals in Brady v. The Dow Chemical Company Retirement Board (No. 07-2040).
Effective Feb. 6, 2001, Union Carbide Corporation (UCC) became a wholly owned subsidiary of Dow Chemical Company. For the next two years the Dow Chemical Company Retirement Board continued to maintain UCC’s defined benefit plan, the Retirement Program Plan for Employees of Union Carbide Corporation and its Participating Subsidiary Companies. However, effective as of Feb. 7, 2003, the Dow board amended the UCC plan and renamed it the Union Carbide Employees’ Pension Plan (UCEPP). The amendment converted the UCC plan into a pension equity plan, under which benefits accrued under a different formula than under the UCC plan. The UCEPP also uses different variables in its benefit formula than the UCC plan.
Benefits became available under the new UCEPP formula on Feb. 7, 2003, but the UCEPP also grandfathered certain benefits under the UCC plan. The UCEPP guaranteed plan participants the benefits that would have been available to them under the UCC plan had they retired on Feb. 6, 2003. The UCEPP also provided that plan participants would continue to earn benefit accruals under the UCC plan formula through Dec. 31, 2005.
The UCC plan had provided both normal retirement benefits and early retirement benefits. Normal retirement benefits were payable to those age 65 or older with one month of service, those age 62 or older with ten years of service, or those whose age plusyears of service totaled 85. Plan participants not yet eligible for normal retirement benefits were eligible for early retirement benefits in the form of a percentage of their full retirement benefits, computed using a reduction factor based on age and length of service. The applicable reduction factors appeared in Table 1 and Table 2 of the UCC plan. Table 1 was applicable to those individuals who retired early voluntarily, while Table 2 was applicable to those individuals who were terminated early involuntarily. Table 2 incorporated a benefit that “bridged” individuals from 83 to 85 points.
Dennis Brady was employed by UCC until July 31, 2004, at which time he was involuntarily terminated at the age of 55. At the time of his forced retirement, Mr. Brady’s age and years of service totaled 83.01. Mr. Brady requested benefits under the Dec. 31, 2005, grandfather formula in the amount of $2,643 per month, maintaining that he was bridged from 83 to 85 under Table 2 of the UCC plan. However, the UCEPP administrators determined that Mr. Brady was entitled to benefits in the amount of only $2,361 per month. According to the plan administrators, the 2003 plan amendment specified that the applicable reduction factors were those indicated under Table 1 of the UCC plan without regard to whether a participant retired early voluntarily or involuntarily.
Suit Alleges Deficient Notice
In a lawsuit filed in the U.S. District Court for the Southern District of West Virginia, Mr. Brady alleged that the Dow board had violated ERISA Sec. 204(h), which requires a plan administrator to provide participants advance notice of a plan amendment that significantly reduces the rate of future benefit accruals or that reduces early retirement benefits or retirement-type subsidies. In the suit, Mr. Brady charged that the notice given by the Dow board failed to adequately inform participants about the elimination of Table 2 from those benefits grandfathered into the UCEPP; and that this deficiency was an “egregious” failure to satisfy ERISA Sec. 204(h). Under ERISA Sec. 204(h), in the event of an egregious failure, participants are entitled to the greater of those benefits available prior to the plan amendment and those benefits currently available under the amended plan. The district court agreed with both of Mr. Brady’s arguments and granted summary judgment in his favor, and on appeal, the Fourth Circuit affirmed that ruling.
With respect to the notice provided by the Dow board, the Fourth Circuit stated, “The board does not dispute that the reduction in Brady’s benefits that resulted from the elimination of Table 2 constituted a reduction in early retirement benefits or retirement-type subsidies. In determining whether the reduction in benefits in Brady’s case was significant, we compare the amount of the benefit under the plan as amended with the amount of the benefit under the plan prior to the amendment. We also conclude that the board could anticipate decreases in benefits of this magnitude at the time the amendment was adopted. The parties stipulate that Brady would have been entitled to an additional $282 per month under Table 2 of the UCC plan. Thus, the applicable plan amendments resulted in a 10.7% reduction in benefits for Brady. We conclude that a reduction of this magnitude is significant.
“Because the elimination of Table 2 caused a significant reduction in retirement benefits, adequate notice was required under ERISA section 204(h). This notice must be ‘written in a manner calculated to be understood by the average plan participant and must provide sufficient information to allow applicable individuals to understand the effect of the plan amendment.’ The board’s 204(h) notice issued to Brady and other plan participants failed in one respect: it did not provide adequate information about the elimination of Table 2 for purposes of the December 31, 2005, grandfather benefit. At the very least, the 204(h) notice fails to provide sufficient information from which an average plan participant could understand that Table 2 would not be available under the December 31, 2005, grandfather benefit. We therefore agree with the district court’s conclusion that the 204(h) notice issued in this case was deficient in that respect.”
The Fourth Circuit went on to conclude, “Undisputed evidence in the record makes clear that UCEPP administrators knew that multiple plan participants were confused about the status of Table 2. Dow’s pension plan leader e-mailed plan personnel to inform them that there had been ‘several inquiries by UCC employees questioning the elimination of the bridging provision as it relates to the grandfathered UCC pension benefit.’ Moreover, Brady participated in a lengthy e-mail exchange with Dow’s pension plan leader in which Brady described why the 204(h) notice was misleading with respect to whether the December 31, 2005, grandfather benefit would retain Table 2’s reduction factors. The record reveals that the Dow board failed to promptly rectify its deficient notice after being put on notice of it. We thus agree with the district court that the Dow board committed an egregious violation of the 204(h) notice requirements.”
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