News & Information

 

FEATURED PRODUCT

CCH's Law, Explanation and Analysis of Health Care Reform Legislation
Get full explanation and analysis of every aspect of health care reform legislation. These legislative changes will imminently impact thousands of employers, private insurance providers, and the Medicare and Medicaid programs. Pre-order today and save $20!

Learn More »

CCH® PENSION AND BENEFITS — 04/03/09

Legality Of “Whipsaw” Lump Sum Calculation Under Cash Balance Plan Can Be Challenged In Court

from Spencer’s Benefits Reports: A former employee who challenged the calculation of her lump sum distribution under a cash balance plan was not required to exhaust her administrative remedies under the plan because an appeal would have been futile. This was the decision of the Sixth Circuit U.S. Court of Appeals in Durand v. The Hanover Insurance Group, Inc. and The Allmerica Financial Cash Balance Pension Plan (No. 07-6468).

Jennifer A. Durand worked for the First Allmerica Financial Life Insurance Company, a subsidiary of The Hanover Insurance Group, from October 1995 to April 2003. Ms. Durand was a participant in the Allmerica Financial Cash Balance Pension Plan, which offered distributions in the form of either a straight-life annuity or a lump sum payment.

For years prior to 2006, if a participant elected a lump sum distribution, the plan determined the actuarial equivalent of the participant’s accrued benefit using a two-step “whipsaw” calculation. First, the participant’s account balance was projected forward to its value at the participant’s normal retirement age, using the rate at which future interest credits would have accrued had the participant remained in the plan. Second, that projected amount was discounted back to its present value on the date of the actual lump sum distribution. Under the plan, participants selected investment options from a 401(k)-style menu, and the market rate of return on the options selected determined the participant’s interest credits. However, the plan did not attempt to make individualized estimates of terminating participants’ future interest credits. Instead, the plan used a uniform projection rate—the 30-year Treasury bill rate—in performing each participant’s whipsaw calculation. The plan then used that same rate to discount the projected balances back to their present values. The result in every case was a “wash.”

When Ms. Durand terminated her employment with First Allmerica, she elected to take a lump sum distribution. Ms. Durand’s hypothetical account balance on the date of her distribution was $17,038. The plan administrators then projected Ms. Durand’s account balance forward using the 30-Year Treasury rate, and then discounted the projected amount back to its present value using that same rate, resulting in a wash, and the Allmerica plan paid Ms. Durand $17,038. In response, Ms. Durand filed a class action suit against Hanover and the Allmerica plan in the U.S. District Court for the Western District of Kentucky, alleging that the plan’s methodology for calculating lump sum distributions violated ERISA. However, the district court ruled in favor of the defendants, holding that Ms. Durand should first have presented her claim to the plan administrators and thus had failed to exhaust her administrative remedies under the plan. Ms. Durand appealed, and the Sixth Circuit reinstated her claim.

In rendering its decision, the Sixth Circuit initially explained, “We routinely enforce the exhaustion requirement when an ERISA plaintiff contends that his benefits were improperly calculated under the terms of a plan. But the same is not true of an across-the-board challenge to the legality of a plan’s methodology. In those cases, the claimant typically concedes that her benefit was properly calculated under the terms of the plan as written, but argues that the plan itself is illegal in some respect. Sending such a claimant back to the administrative process, to recalculate a benefit she concedes was already properly calculated under the terms of the plan as written, misses the point of the dispute. In that situation, exhaustion wastes resources rather than conserves them.” (Emphasis in original.)

The Sixth Circuit went on to conclude, “Durand has no quarrel with Allmerica’s calculation of her lump sum distribution under the terms of the plan as written; instead, her claim is that the plan’s methodology for calculating such distributions is illegal. Her claim is thus directed to the plan’s legality; and forcing her to resort to her administrative remedies, rather than her legal ones, would be futile. Adjudication of Durand’s claim need not put the district court on a path that ends with the court itself trying to estimate what her future interest credits would have been. Rather, if the district court determines that the plan’s methodology violates ERISA, the court could simply award injunctive relief that requires Allmerica, in the first instance, to do what the law requires. Futility, in conclusion, is a practical doctrine. And the practical reality is that administrative review of Durand’s claim would only delay its resolution, if not send the claim off a cliff altogether. Administrative review of Durand’s claim would be futile; and litigation of its merits should proceed without delay.”

Visit our News Library to read more news stories.