Opinion ID: 1435649
Heading Depth: 2
Heading Rank: 3

Heading: The Minimum Benefit Accrual Tests

Text: Cash balance plans, such as the Citibuilder Plan, are defined benefit plans within the meaning of ERISA because they guarantee a prescribed level of retirement benefits. Esden, 229 F.3d at 158; see also 29 U.S.C. § 1002(35). All defined benefit plans must comply with ERISA's minimum benefit accrual rules, which are primarily designed to minimize backloading. Langman v. Laub, 328 F.3d 68, 71 (2d Cir.2003); H.R.Rep. No. 93-807 (1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4688. Backloading occurs when a plan awards a covered employee disproportionately higher benefit accruals for later years of service. Langman, 328 F.3d at 71. Thus, while ERISA does not require pension plans to pay out any specific dollar amount, it does regulate the rate at which benefits accrue. 29 U.S.C. § 1054(b)(1); see Cent. Laborers' Pension Fund v. Heinz, 541 U.S. 739, 743, 124 S.Ct. 2230, 159 L.Ed.2d 46 (2004). Toward that end, ERISA sets forth three alternative minimum benefit accrual tests; pension plans are required to pass one. 29 U.S.C. § 1054(b)(1)(A)-(C). Two of these tests are implicated by this appeal: the 133 1/3 test and the fractional test. Under the 133 1/3 test, the rate of benefit accrual in any future year may not be more than one-third greater than the rate in the current year. 29 U.S.C. § 1054(b)(1)(B). This test prevents backloading by cabining fluctuation in accrual rates. As the Supreme Court explained, the 133 1/3 test permits the use of any accrual formula as long as the accrual rate for a given year of service does not vary beyond a specified percentage from the accrual rate of any other year under the plan. Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 514 n. 9, 101 S.Ct. 1895, 68 L.Ed.2d 402 (1981). The fractional test is essentially a pro rata rule under which in any given year, the employee's accrued benefit is proportionate to the number of years of service as compared with the number of total years of service appropriate to the normal retirement age. Id. ; see also 29 U.S.C. § 1054(b)(1)(C). In other words, this test uses a fractional calculation based on years of service to ensure that benefits accrue at a rate that approximates the prorated amount of the total benefits that the employee would receive if he or she worked until normal retirement age. One unique feature of the fractional test formula is that it uses the employee's current compensation rate to project the total benefits available at retirement. This means that the formula assumes no salary increases for the employee. Article 4.1(e) of the Citibuilder Plan sets forth its mechanism for compliance with ERISA's minimum accrual standards. [4] Although the percentage of compensation that Citigroup contributes to participants' accounts increases by more than one third, based on increasing age and service years, the Plan may still qualify under the 133 1/3 percent test because of the value of the interest credits compounded annually through normal retirement age. Esden, 229 F.3d at 167 n. 18. Compliance with the 133 1/3 percent rule depends upon the balance between Benefit Credits, which increase with age, and Interest Credits, which decrease with age. Compliance is also contingent upon the variable interest rate remaining sufficiently high to counterbalance the increase in Benefit Credits with the decrease in Interest Credits. In order to ensure compliance, regardless of fluctuations in the interest rate, Citigroup's Plan provides that when the rate of accrual does not satisfy the 133 1/3 test, participants' accounts will be made to comply with the fractional rule of accrual upon the termination of the period of employment. If the variable interest rate falls to a level at which compliance with the 133 1/3 test is not possible, Citigroup will calculate the minimum account requirements pursuant to Article 4.1(e) and then add the difference to the participants' accounts. Under the interest rates in effect in 2000 and 2001, the Plan was in compliance with the 133 1/3 test, and neither Article 4.1(e) nor the fractional test was implicated. However, beginning in 2002, a change in the interest rate brought the Plan out of compliance with the 133 1/3 test for some participants. Article 4.1(e) was invoked with respect to the affected participants in order to bring the Plan into compliance with ERISA's minimum accrual rules.