Opinion ID: 219338
Heading Depth: 2
Heading Rank: 1

Heading: facts

Text: In 1998 S.C. Johnson & Son amended its ERISA plan, converting it from a traditional defined benefit plan into a cash balance plan. Cash balance plans are formally classified as defined benefit plans, but they function more like defined contribution plans, in particular by providing an account balance for each participant. But a cash balance plan participant's balance is only a notional tool for estimating pension benefits  not an actual account containing money. As amended, the S.C. Johnson Plan provided that each participant's notional account balance would be increased by annual interest credits. The Plan calculated interest at the greater of 4%, or 75% of the Plan's rate of return on its investments. Further, the Plan provided that, if a participant left the Plan before reaching age 65, the participant could take a lump-sum distribution of the value of the account. However, the provisions of the Plan ensured that any lump-sum distribution would be only the current account balance. No upward adjustment would be made for the future interest credits the participant would earn by staying in the Plan. The ERISA statute has something to say about early lump-sum distributions: they must be the actuarial equivalent of the value of the account at age 65. 29 U.S.C. § 1054(c)(3); see Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 759 (7th Cir.2003). The drafters of the present Plans were obviously aware of this rule, because they included § 5.2, which states: The Cash Balance Account is the Actuarial Equivalent of the projected annuity at normal retirement because the Plan deems the return on 30 year Treasuries to be the reasonable rate of return to assume for purposes of that projection.... This section created a wash calculation designed to add zero interest to lump-sum distributions. This is because during the relevant period ERISA prescribed that, when calculating the present value of lump-sum distributions, plans should use the 30-year Treasury rate as the discount rate. [1] So if a participant was leaving at age 40, the Plan would calculate interest out to age 65 at the 30-year Treasury rate, as prescribed in § 5.2 of the Plan  then discount it back to age 40 at the exact same rate, as prescribed by the statute. The participant would therefore receive as a net amount only his current account balance (without future interest). This provision was concededly unlawful. The 30-year Treasury rate, despite the Plan's ipse dixit, did not produce the actuarial equivalent of what the Plan provided to ongoing participants  interest calculated at the greater of 4% or 75% of the Plan's rate of return. The Plans effectively penalized lump-sum distributees by voiding their future interest credits, and this violated ERISA. See Berger, 338 F.3d at 761; Esden v. Bank of Boston, 229 F.3d 154, 168 (2d Cir.2000).