Opinion ID: 507220
Heading Depth: 2
Heading Rank: 2

Heading: statutes and interpretations by regulatory agencies

Text: 18 Section 4044 of ERISA, 29 U.S.C. Sec. 1344, contains detailed provisions applicable to the post-termination allocation and distribution of plan assets to plan participants. In addition, Sec. 403(c) and Sec. 4044(d) of ERISA, 29 U.S.C. Sec. 1103(c) and Sec. 1344(d), and Sec. 401(a)(2) of the Internal Revenue Code, 26 U.S.C. Sec. 401(a)(2), specifically allow surplus assets remaining after satisfaction of a plan's liabilities to revert to the employer or plan sponsor when a defined benefit plan terminates. 9 These provisions create exceptions to the general rule that plan assets must be held for the exclusive benefit of employees and may never inure to the benefit of the plan sponsor. We address in turn the ERISA allocation provisions, the ERISA and Internal Revenue Code exceptions to the exclusive benefit and non-inurement rules, and the pertinent regulations interpreting these statutes. 19 As a preliminary matter, we note that we owe great deference to the interpretations and regulations of the Pension Benefit Guaranty Corporation (PBGC), the Internal Revenue Service (IRS) and the Department of Labor, which are the administrative agencies responsible for enforcing and interpreting ERISA. As the Supreme Court stated, a court that tries to chart a true course to the Act's purpose embarks on a voyage without a compass when it disregards the agency's views. Ford Motor Co. v. Milhollin, 444 U.S. 555, 568, 100 S.Ct. 790, 798, 63 L.Ed.2d 22 (1980). The Supreme Court has consistently advised that courts must adhere to the venerable principle that the construction of a statute by those charged with its execution should be followed unless there are compelling indications that it is wrong.... Red Lion Broadcasting Co., Inc. v. F.C.C., 395 U.S. 367, 381, 89 S.Ct. 1794, 1802, 23 L.Ed.2d 371 (1969). Furthermore, we only must determine whether the agency's interpretation is reasonable. In making this determination, we need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding ... [A] court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 n. 11 and 844, 104 S.Ct. 2778, 2782 n. 11 and 2782, 81 L.Ed.2d 694 (1984). 10 Finally, we must defer not only to the regulations promulgated by administrative agencies charged with the enforcement and interpretation of ERISA and the Internal Revenue Code but also, when a regulation can be interpreted in more than one plausible way, we must recognize and defer to the agencies' interpretation of the regulation. Ford Motor Co., 444 U.S. at 560, 100 S.Ct. at 794 (where statute and regulations in consumer credit area were susceptible to divergent interpretations, the court deferred to opinion letters and consumer advice publications which set forth the interpretation of the regulation by the appropriate administrative agency); Anderson Bros. Ford v. Valencia, 452 U.S. 205, 219, 101 S.Ct. 2266, 2274, 68 L.Ed.2d 783 (1981) (absent some obvious repugnance to the statute, the [agencies'] regulation implementing this legislation should be accepted by the courts, as should the [agencies'] interpretation of its own regulation.).
20 When a single-employer defined benefit plan is voluntarily terminated by the employer, plan assets must be distributed to plan participants in accordance with the sixtier allocation scheme set forth in ERISA Sec. 4044, codified as 29 U.S.C. Sec. 1344. The six priority categories range from Category 1, which has the narrowest scope and highest priority, to Category 6, which has the broadest scope and lowest priority. The scope of each category is as follows: 21 Category 1: The portion of an employee's accrued benefits derived from voluntary employee contributions. 22 Category 2: The portion of an employee's accrued benefits derived from mandatory employee contributions. 23 Category 3: Annuity benefits that were or could have been in payout status three years before the plan terminated. (i.e. benefits that retired workers were receiving or could have received had they chosen to retire within the three years immediately prior to the termination date). 24 Category 4: All other benefits guaranteed by the PBGC. 25 Category 5: [A]11 other nonforfeitable benefits under the plan. 26 Category 6: [A]11 other benefits under the plan. 27 29 U.S.C. Sec. 1344(a). The employer/plan sponsor must satisfy all claims within a particular category before it distributes any assets to the next lower priority category. 29 C.F.R. Sec. 2618.10(d). If the assets are insufficient to satisfy all the claims within a particular category, the assets are distributed among the participants according to the ratio that the value of each participant's benefit or benefits in that priority category bears to the total value of all benefits in that priority category. 29 C.F.R. Sec. 2618.10(e). Any assets remaining after satisfaction of all liabilities in Categories 1-6 can revert to the employer if the plan specifically allows such a reversion and the distribution is not otherwise unlawful. 29 U.S.C. Sec. 1344(d)(1). 28 Only Categories 4, 5, and 6 are relevant to this litigation. 11 Category 4 encompasses benefits guaranteed by the PBGC. The PBGC guarantees all benefits that are nonforfeitable (i.e. vested) 12 immediately prior to plan termination and that conform to certain other restrictions which are met in this case. See 29 U.S.C. Sec. 1322 and 29 C.F.R. Sec. 2613. The parties agree that all of Blessitt's benefits calculated under Formula 2 are Category 4 benefits (i.e. guaranteed, vested benefits). The parties also agree that if Blessitt is entitled to any Formula 1 benefits based on future years of service, these benefits must fall within the scope of Categories 5 or 6. 29 The plain language of Categories 5 and 6 clearly specifies that these sections extend only to benefits under the plan. Category 5 covers all other nonforfeitable benefits under the plan. 29 U.S.C. Sec. 1344(a)(5). Category 6 covers all other benefits under the plan. 29 U.S.C. Sec. 1344(a)(6). The benefit provisions of the Dixie Engine plan are detailed and comprehensive; no part of the plan directly or indirectly creates or describes benefits based on anticipated future years of service. The only benefits provided by the Dixie Engine plan are the accrued benefits calculated under the two formulas set out above. The applicability of each formula is clear: Formula 1 calculates [t]he Monthly Accrued Benefit as of any date of determination [plan termination] on or subsequent to a Participant's Normal Retirement Date ; Formula 2 calculates [t]he Monthly Accrued Benefit as of any determination date prior to a Participant's Normal Retirement Date. Article V Paragraph 1 (emphasis supplied). 13 Attainment of normal retirement age (65) is the plan's unambiguous prerequisite for qualifying for Formula 1 benefits. For employees such as Blessitt who had not reached normal retirement age when the plan terminated, the only benefits available or promised under the plan are the Formula 2 benefits. Consequently, to award Blessitt benefits based on his anticipated future years of service would exceed the unambiguous terms of the plan and therefore would contradict the plain language of the Section 1344 allocation provisions of ERISA. 30
31 In general, an employer who sponsors and funds an employee benefit plan must hold, use, and distribute the plan assets for the exclusive benefit of the employees who participate in the plan. 26 U.S.C. Sec. 401(a)(2); 29 U.S.C. Sec. 1103(c). 14 ERISA also requires that the assets of a plan shall never inure to the benefit of any employer.... 29 U.S.C. Sec. 1103(c)(1). Both the exclusive benefit and non-inurement rules must be satisfied in order for the pension plan to gain tax-favored status. Under certain circumstances specified in the statute, however, neither the exclusive benefit nor the non-inurement rule is violated if excess plan assets revert to the plan sponsor when a defined benefit plan is terminated. 32 Under Sec. 401(a)(2), if the employer satisfies all plan liabilities, it can recover any surplus assets that remain without violating the exclusive benefit rule. Treasury Regulation Sec. 1.401-2(b)(1) 15 explains the meaning of liabilities under Section 401(a)(2) as follows: 33 (1) The intent and purpose in section 401(a)(2) of the phrase 'prior to the satisfaction of all liabilities with respect to employees ...' is to permit the employer to reserve the right to recover at the termination of the trust ... any balance remaining in the trust which is due to erroneous actuarial computations during the previous life of the trust. A balance due to an 'erroneous actuarial computation' is the surplus arising because actual requirements differ from the expected requirements.... 34 For example, a trust has accumulated assets of $1,000,000 at the time of liquidation, determined by acceptable actuarial procedures ... as being necessary to provide the benefits in accordance with the provisions of the plan. Upon such liquidation it is found that $950,000 will satisfy all of the liabilities under the plan. The surplus of $50,000 arises, therefore, because of the difference between the amounts actuarially determined and the amounts actually required to satisfy the liabilities. This $50,000, therefore, is the amount which may be returned to the employer as the result of an erroneous actuarial error. 35 26 C.F.R. Sec. 1.401-2(b)(1) (emphasis supplied). From the example given in the regulation, it is clear that any plan assets remaining after the satisfaction of all liabilities under the plan are defined to be the result of actuarial error and therefore a reversion of these assets to the employer does not violate the exclusive benefit rule. 36 The plan's reversion provision mirrors the regulatory interpretation of Sec. 401(a)(2). Paragraph 11 of Article XI, as amended, states that any assets remaining after the plan's liabilities are met shall ... be deemed to have become available as a result of actuarial error and shall be distributed to the Employer in cash. 37 Treasury Regulation Sec. 1.401-2(b)(2) requires that the plan's fixed and contingent liabilities to employees both must be satisfied before any reversion can occur. Fixed liabilities are benefits that are vested when the plan terminates; contingent liabilities are benefits that are accrued but not yet vested when the plan terminates. These definitions have been consistently applied by the Internal Revenue Service and Treasury for more than thirty-five years. For example, in Revenue Ruling 85-6, 1985-1 C.B. 133, the Internal Revenue Service explained that section 1.401-2(b)(2) provides that the liabilities that must be satisfied include both fixed (those nonforfeitable prior to termination) and contingent (those not nonforfeitable prior to termination) liabilities. After satisfaction of those liabilities, an employer may recover any remaining funds from the plan as surplus resulting from actuarial error. 16 38 Contingent liabilities have never been interpreted to include benefits that had not yet accrued when a plan terminated. In I.R.S. Publication 778, the Service reiterated its longstanding position that fixed liabilities are the amounts required to provide the benefits payable to those who have become entitled to them. Contingent liabilities are the benefit credits accrued up to the time of termination of the trust for employees (and their beneficiaries) who might have become entitled to benefits if the trust had been continued indefinitely. I.R.S. Pub. No. 778, Part 3(d) (February 1972). 17 In short, well established regulatory interpretation is inconsistent with Blessitt's argument that the law requires a plan to pay unaccrued benefits upon termination based upon future years of service not actually worked. As discussed above, we owe great deference to regulations promulgated by administrative agencies charged with enforcing a statute. 39 The reversion Dixie Engine seeks conforms with Sec. 401(a)(2) and the Treasury Regulations and Revenue Rulings interpreting it. As noted above, the reversion provision of the plan is fully synchronized with the regulatory interpretation of Sec. 401(a)(2). Moreover, Dixie Engine satisfied all the plan's fixed and contingent liabilities when it paid participants all the benefits they had accrued under the plan as of the termination date, including those benefits that had not yet vested. Nothing in the plan requires unaccrued benefit expectancies (i.e. benefits based on future years of service not actually worked) to be paid prior to reversion of surplus assets to the employer. Section 401(a)(2) requires nothing more. 18 40 The corresponding provisions of ERISA are in accord with the foregoing Internal Revenue Code provisions. The ERISA exclusive benefit and non-inurement rules provide an explicit exception for reversions that occur in accordance with the 29 U.S.C. Sec. 1344 allocation provisions. Section 4044(d) of ERISA, 29 U.S.C. Sec. 1344(d), allows residual assets to revert to the employer if all the liabilities of the plan are met, the distribution does not otherwise violate the law, and the plan provides for such a distribution. Blessitt contends only that Dixie Engine did not satisfy all the plan liabilities. Residual assets are defined by the PBGC regulations as the plan assets remaining after all liabilities of the plan to participants and their beneficiaries for benefits through priority category 6 have been satisfied. 29 C.F.R. Sec. 2618.2. As discussed above, the benefits Blessitt seeks are not among those required to be allocated under the six priority categories and distributed to employees because these benefits are not benefits under the plan. The assets necessary to satisfy these benefits therefore are residual assets which may revert to the employer in accordance with the recognized statutory exception to ERISA's exclusive benefit and non-inurement rules. 41 In addition to the administrative interpretations of the specific statutes and regulations discussed above, there are other relevant administrative interpretations which we must consider. The three agencies charged with administering ERISA--the PBGC, the IRS, and the Department of Labor--all concur that benefit accrual ceases when a plan terminates. Blessitt's argument that he is entitled to benefits he expects to accrue through his anticipated future years of service directly conflicts with these administrative interpretations to which we owe deference. 42
43 In May 1984, the Treasury, the PBGC, and the Department of Labor issued joint administrative guidelines applicable to the termination of defined benefit plans involving reversions of excess assets to the plan sponsor. PBGC News Release 84-23 (May 23, 1984), reprinted at 11 Pens.Rep. (BNA) 724 (May 28, 1984). Paragraph one of the guidelines provides that when an employer terminates a defined benefit pension plan, it may not recover any surplus assets until it has fully vested all participants' benefits and has purchased and distributed annuity contracts to protect participants against the risk that their accrued benefits may be jeopardized by future market fluctuations or other factors. (emphasis supplied). It is clear from this portion of the guidelines that an employer must satisfy only the employees' accrued benefits under the plan--not benefits that would accrue in the future if the employees continued to work for the employer after the plan terminates--before a reversion of the residual assets is permitted. 44
45 The PBGC consistently has construed Category 6 to include only benefits actually accrued as of the termination date according to the terms of the plan. 19 Blessitt's assertion that Category 6 includes unaccrued benefits based on future years of service not actually worked is inconsistent with the PBGC's longstanding position. 46 Numerous PBGC Opinion Letters reiterate the PBGC's longstanding position that accrual of benefits for purposes of ERISA ceases when a plan terminates. For example, in PBGC Opinion Letter 86-5 (March 6, 1986), the PBGC advised a plan sponsor that ERISA does not apply to assets remaining after the satisfaction ... of all accrued benefits under a pension plan that has not provided for employee contributions. Hence a transfer of such assets to a separate trust to await further disposition would not violate the provisions of Title IV [of ERISA]. Similarly, in PBGC Opinion Letter 86-1 (January 15, 1986), the PBGC gave the following advice: 47 As a participant accrues more years of service, he or she generally accrues higher benefits which will be payable upon retirement. On the date of plan termination, however, all accruals will cease. Benefit entitlements under the terminated plan are calculated with reference only to each participant's service accrued up to the date of termination. For example, a participant with 15 years of service and 45 years of age on the date of plan termination will generally be entitled to a benefit calculated with reference to 15 years of service and payable at normal retirement age. 48 This interpretation directly contradicts Blessitt's position. See also PBGC Opinion Letters 85-28 (December 2, 1985) and 85-9 (April 5, 1985) (when a defined benefit plan terminates, residual assets in excess of the accrued benefits under the plan as of the termination date can revert to the employer).