Court Opinion

ID: 3038767
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:59:21.012456+00
Date Added: 2024-06-11T07:37:55.979738
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

WALDAMAR MILLER; THOMAS H.             
SUDDUTH, JR.; J. DENTON ALLEN,
individuals,
              Plaintiffs-Appellants,
                 v.
XEROX CORPORATION RETIREMENT                 No. 04-55582
INCOME GUARANTEE PLAN, an                     D.C. No.
Employee Pension Benefit Plan;             CV-98-10389-WMB
XEROX CORPORATION, a New York
Corporation; PATRICIA NAZEMETZ,
as Plan Administrator of the
Xerox Corporation Retirement
Income Guarantee Plan,
             Defendants-Appellees.
                                       

WALDAMAR MILLER; THOMAS H.             
SUDDUTH, JR.; J. DENTON ALLEN,
individuals,
              Plaintiffs-Appellants,
                 v.                          No. 04-55583
XEROX CORPORATION RETIREMENT                   D.C. No.
INCOME GUARANTEE PLAN, an                 CV-99-02589-WMB
Employee Pension Benefit Plan;
                                              AMENDED
XEROX CORPORATION, a New York
                                               OPINION
Corporation; PATRICIA NAZEMETZ,
as Plan Administrator of the
Xerox Corporation Retirement
Income Guarantee Plan,
             Defendants-Appellees.
                                       
                            11219
11220               MILLER v. XEROX CORP.
         Appeal from the United States District Court
              for the Central District of California
        William Matthew Byrne, Senior Judge, Presiding

                  Argued and Submitted
           December 9, 2005—Pasadena, California

                    Filed May 8, 2006
                Amended September 13, 2006

         Before: Harry Pregerson, John T. Noonan, and
              Sidney R. Thomas, Circuit Judges.

                  Opinion by Judge Thomas
11222               MILLER v. XEROX CORP.

                         COUNSEL

John A. Strain; Redondo Beach, California, for the appellants.
                     MILLER v. XEROX CORP.                 11223
Lisa Von Eschen, Robert W. Perrin, and Lauren E. Kim;
Latham & Watkins; Los Angeles; California, for the appel-
lees.

                          OPINION

THOMAS, Circuit Judge:

   This appeal presents the question of whether a procedure
used by Xerox Corporation (“Xerox”) to reduce pension bene-
fits at final retirement to account for earlier benefit distribu-
tions violates the Employee Retirement Income Security Act
of 1974 (“ERISA”), 29 U.S.C. § 1000 et seq. We conclude
that Xerox’s method violates ERISA, because it impermiss-
ibly reduces pension benefits by more than the accrued pen-
sion benefit attributable to the earlier distributions.

                                I

  The facts of the case are undisputed. Plaintiffs Waldamar
Miller, Thomas H. Sudduth, Jr., and J. Denton Allen (“the
Employees”), all worked for Xerox for many years, received
lump sum pension payouts when they left employment in
1983, and returned to work at the company several years later.

   During their initial employment with Xerox, the Employees
participated in two company retirement plans: the Xerox
Retirement Income Guarantee Plan and the Xerox Profit Shar-
ing Plan. The Income Guarantee Plan, a traditional defined
benefit pension plan, provided participants with a certain per-
cent of their salary in retirement for each year of service at
Xerox, according to a specified formula (“Income Guarantee
Plan formula benefit”). Under the Profit Sharing Plan, a
defined contribution plan, each participant had an individual
Retirement Account. The company made contributions to
each employee’s account, and the accounts were included in
a fund invested and managed by the plan’s trustees.
11224               MILLER v. XEROX CORP.
   The two plans were linked in a “floor-offset” arrangement,
under which the Income Guarantee Plan formula benefit
served as the “floor” value of a retiree’s pension benefits:
each retiree would receive the value of his Retirement
Account benefit, supplemented by the value of the Income
Guarantee Plan formula benefit to the extent that it exceeded
the Retirement Account benefit.

   When each Employee left Xerox in 1983, he received a
lump sum payment from his Retirement Account. Because the
distribution from the Retirement Account in each case
exceeded the lump-sum present value of the Employee’s
accrued benefit under the Income Guarantee Plan formula
benefit, no payment was made from the Income Guarantee
Plan itself. Although each Employee returned to work at
Xerox sometime between 1987 and 1989, none of the
Employees has repaid any portion of his Retirement Account
distribution into any Xerox plan, nor do the plans require or
permit such a repayment.

   In 1989, Xerox restated and consolidated the Income Guar-
antee Plan and the Profit Sharing Plan. The restatement
amended the Income Guarantee Plan formula, eliminated the
Profit Sharing Plan, and replaced the Profit Sharing Plan with
two new accounts within the Income Guarantee Plan: the
Cash Balance Retirement Account and the Transitional
Retirement Account. The new Income Guarantee Plan for-
mula was based on the participant’s highest average pay mul-
tiplied by 1.4% and the member’s years of service up to 30
years. The Cash Balance Retirement Account, a “cash bal-
ance” plan, used the participant’s existing Retirement
Account balance as the initial balance, and received annual
credits from Xerox of 5% of the participant’s salary, plus
interest at a fixed annual rate equal to the twelve-month Trea-
sury Bill rate plus 1%. The Transitional Retirement Account
consisted of the Retirement Account balance alone, and
received no further contributions, but could grow or shrink
according to the investment performance of the funds in
                     MILLER v. XEROX CORP.                 11225
which the accounts were invested. Upon retirement, a partici-
pant received the largest of the three benefits — Income
Guarantee Plan formula benefit, Cash Pension Retirement
Account balance, or Transitional Retirement Account balance
— in the form of an annuity.

   For employees who had already received a distribution of
pension benefits on a prior departure from the company,
Xerox reduced final retirement benefits to account for the ear-
lier distribution by using so-called “phantom accounts.” Phan-
tom accounts were calculated for the Cash Balance
Retirement Account and the Transitional Retirement Account,
consisting of the actual distribution amount at the time of
departure plus the increase or decrease that the distribution
would have earned had it remained in each plan. Thus, for the
Cash Balance Retirement Account, the phantom account was
equal to the distribution amount plus interest at the rate speci-
fied in the plan. For the Transitional Retirement Account, the
phantom account was the distribution amount plus the invest-
ment returns (or losses) of the fund in which that amount had
been invested at distribution.

   Under the amended Income Guarantee Plan, the relevant
phantom account was added to the amount of each partici-
pant’s benefit before the three benefit choices were compared.
The participant was given the benefit that yielded the highest
monthly payment (with the phantom accounts included), and
the phantom account was then subtracted out to yield the
actual benefit amount. If the Income Guarantee Plan benefit
was the largest, the Transitional Retirement Account phantom
account was subtracted.

  In 1997 and 1998, each of the Employees requested a state-
ment of the benefits that would be payable upon his retire-
ment. Each of the statements Xerox provided applied the
phantom account offset described above, to drastic effect:
Sudduth’s monthly benefit fell from $1,679.23 to $83.16,
Allen’s monthly benefit fell from $2,059.44 to $262.69, and
11226               MILLER v. XEROX CORP.
Miller’s monthly benefit fell from $2,878.40 to $554.51. The
Employees challenged the phantom account offset, pursuing
two levels of administrative appeals. Xerox rejected Miller
and Sudduth’s appeals by letter dated September 9, 1998, and
rejected Allen’s appeal by letter dated March 8, 1998.

   Miller and Sudduth filed a complaint in the United States
District Court for the Central District of California on Decem-
ber 23, 1998. Allen filed his complaint on March 12, 1999.
The two cases were stayed in June 1999 pending resolution of
the appeal in Hammond v. Xerox Corp. Retirement Income
Guarantee Plan, No. 97-8349, 1999 WL 33915859 (C.D. Cal.
April 8, 1999), which raised different challenges to the 1989
plan amendments at issue here. After Hammond was affirmed
in an unpublished decision, the Employees filed amended
complaints in both actions. The parties then filed stipulated
facts and exhibits. The two cases were formally consolidated
on January 4, 2002, and a trial consisting of closing argu-
ments was held on April 3, 2002.

   The district court granted judgment for Xerox, holding that
the “phantom account” mechanism did not violate ERISA.
The court also found that Xerox’s disclosure of the method
had been inadequate in documents issued in 1993, but that the
Employees were not entitled to any remedy for that deficient
disclosure because they had neither relied on that disclosure
nor been prejudiced by it. The Employees timely filed this
appeal. Because this appeal presents only questions of law,
our review is de novo. Michael v. Riverside Cement Co. Pen-
sion Plan, 266 F.3d 1023, 1026 (9th Cir. 2001).

                              II

  Xerox’s method of accounting for prior distributions in cal-
culating the Employees’ final retirement benefits violates the
substantive requirements of ERISA. The Income Guarantee
Plan phantom offset violates ERISA by overestimating the
value of distributions made upon a previous separation from
                          MILLER v. XEROX CORP.                       11227
employment, and the corresponding reduction in benefits at
retirement. ERISA requires actuarial equivalence between the
actual distribution and the accrued benefit it replaces.

   [1] As a hybrid defined benefit plan with some features of
a defined contribution plan,1 the Income Guarantee Plan (both
before and after amendment, and including the Cash Balance
Retirement Account component) must satisfy the actuarial
rules ERISA applies to defined benefit plans.2 29 U.S.C.
§ 1002(35). It is well settled that ERISA allows so-called
“floor-offset” plans, in which the participant takes the greater
of a defined benefit or a defined contribution benefit amount.3
  1
     ERISA defines a “defined benefit plan” as “a pension plan other than
an individual account plan,” but also permits hybrid plans. 29 U.S.C.
§ 1002(35). The Profit Sharing Plan was a defined contribution plan,
which ERISA defines as “a pension plan which provides for an individual
account for each participant and for benefits based solely upon the amount
contributed to the participant’s account, and any income, expenses, gains
and losses, and any forfeitures of accounts of other participants which may
be allocated to such participant’s account.” 29 U.S.C. § 1002(34).
   2
     This statutory requirement is explicit, and reads as follows:
      [A] pension plan which is not an individual account plan and
      which provides a benefit derived from employer contributions
      which is based partly on the balance of the separate account of
      a participant — . . .
      (B) for the purposes of paragraph (23) of this section [defining
      accrued benefit] and section 1054 of this title [regulating benefit
      accrual], shall be treated as an individual account plan to the
      extent benefits are based upon the separate account of a partici-
      pant and as a defined benefit plan with respect to the remaining
      portion of benefits under the plan.
29 U.S.C. § 1002(35).
   3
     A pension plan participant’s “accrued benefit” is, “in the case of a
defined benefit plan, the individual’s accrued benefit determined under the
plan and, except as provided in [29 U.S.C. § 1054(c)(3)], expressed in the
form of an annual benefit commencing at normal retirement age.” 29
U.S.C. § 1002(23)(A). The normal form of this benefit is a joint and survi-
vor annuity. 29 U.S.C. § 1055(a)(1). “[I]n the case of a plan which is an
individual account plan,” the accrued benefit is simply “the balance of the
individual’s account.” 29 U.S.C. § 1002(23)(B).
11228                     MILLER v. XEROX CORP.
However, the defined benefit and defined contribution por-
tions of a combined floor-offset plan must satisfy the ERISA
requirements applicable to the respective types of plans.

   Here, the distributions made to the Employees in 1983 were
intended to satisfy Xerox’s obligations under both the Profit
Sharing Plan and the Income Guarantee Plan, although they
were made solely from the Profit Sharing Plan, because the
Profit Sharing Plan account balance exceeded the value of the
Income Guarantee Plan formula. When the distributions are
viewed as a free-standing defined contribution plan benefit,
they cause no difficulty: the Employees received the full
amount of their individual account balances, and the rules for
defined contribution pension plans require no more.

   [2] The trouble arises in integrating the distributions with
Xerox’s obligations under the defined benefit portion of its
pension plans. The Income Guarantee Plan guaranteed the
Employees a minimum total retirement benefit, and provided
benefits to the extent the Profit Sharing Plan failed to satisfy
that minimum. The Income Guarantee Plan’s promise of a
defined benefit amount triggered ERISA’s defined benefit
plan rules, which require that any lump-sum substitute for an
accrued pension benefit be the actuarial equivalent of that
benefit. 29 U.S.C. § 1054(c)(3). Some reduction of future
pension benefits to account for the prior distributions is
appropriate, but only to the extent that the future benefit is
“attributable to the distribution.”4 26 C.F.R. § 1.411(a)-
7(d)(6).
  4
  IRS regulations that also apply to the parallel ERISA provisions, see
ERISA § 3002(c), 29 U.S.C. § 1202(c), permit such reductions as follows:
      [T]he fact that a plan cannot disregard an accrued benefit attribut-
      able to service for which an employee has received a distribution
      because the plan does not satisfy the cash-out requirements of
      [ERISA’s buyback rules] does not mean that the employee’s
      accrued benefit (computed by taking into account such service)
      cannot be offset by the accrued benefit attributable to the distri-
      bution.
26 C.F.R. § 1.411(a)-7(d)(6) (emphasis added).
                        MILLER v. XEROX CORP.                       11229
   [3] An accrued benefit under a defined benefit plan is ordi-
narily expressed as an annuity commencing at normal retire-
ment age. See 29 U.S.C. § 1002(23)(A). Thus, the “accrued
benefit attributable to the distribution” for each Employee
should be expressed as an annuity. When the Employees first
left Xerox, they received Profit Sharing Plan distributions
because their Profit Sharing Plan account balances exceeded
the benefit which they were guaranteed under the Income
Guarantee Plan formula. These distributions can, of course, be
offset from the benefits guaranteed under the Income Guaran-
tee Plan formula. However, because ERISA requires actuarial
equivalence for any reduction in benefits based on prior distri-
butions, Xerox’s method of calculating the offset is imper-
missible. The benefit properly attributable to the Profit
Sharing Plan distributions is simply the Income Guarantee
Plan annuity amount that those distributions would have pro-
vided. Any later change in the value of the distribution should
not affect the amount of the benefit under the Income Guaran-
tee Plan defined benefit formula that was attributable to the
distribution when it was made. Although floor-offset plans are
permissible, the offset permitted is not one increased post hoc
by Xerox, but one based on the actual actuarial equivalent of
the distribution.5 In short, Xerox may not use a projected-to-
  5
    The actuarial equivalence requirement applies indirectly here: the
promised benefit at issue is the amount by which the Income Guarantee
Plan formula benefit exceeds the value of the Profit Sharing Plan account
balance. The phantom account device distorts the value of the Profit Shar-
ing Plan account, not the Income Guarantee Plan formula itself. However,
ERISA’s actuarial equivalence requirement would be meaningless —
which, even in this indirect, floor-offset context, it cannot be — if Xerox
could simply redefine at will the Profit Sharing Plan balance actually dis-
tributed, thereby reducing its Income Guarantee Plan obligations. We do
not consider here nor disapprove the use of benefit offsets in general,
which the courts have plainly sanctioned, or the Profit Sharing Plan offset
itself, but only the actuarial sleight of hand behind the phantom account
offset. We note, also, that the benefit offsets previously sanctioned have
involved not phantom benefit enhancements imagined by an employer, but
more mundane creatures such as Social Security or workers compensation
benefits, or complementary pension benefits from other plans, which
workers actually receive. See, e.g., Alessi v. Raybestos-Manhattan, Inc.,
451 U.S. 504 (1981).
11230                   MILLER v. XEROX CORP.
the-present value generated from a phantom account as a
proxy for the actual distribution amount.

   The logic of this is more readily apparent when one com-
pares this situation to one in which a participant receives a
lump-sum distribution from a straight defined benefit plan
(i.e., one without a floor-offset arrangement), and then
resumes employment under the same plan. If the participant
worked for 10 years, left the company, and received a lump-
sum distribution actuarially equivalent to a $300/month annu-
ity (say 1.5% of a $2000/month salary for each year), the plan
could subtract the $300/month “accrued benefit” represented
by that distribution from a later calculation of benefits after
the participant resumed employment and worked another 20
years.6 Nothing in the regulations or the statute, however,
would permit the company to subtract more than that $300/
month “accrued benefit attributable to the distribution.”

   [4] Here, Xerox essentially seeks instead to recalculate the
“accrued benefit” satisfied by the initial distribution based on
later developments, namely investment performance of the
funds in which the money would have been held, had it not
been distributed. The rate of return on Xerox’s funds is not
actuarially relevant to the accrued benefit that the distribution
  6
    Because pensions depend on a participant’s salary at the end or highest
point of his career as well as on his years of service, subtracting the $300/
month would cause a less drastic reduction than simply disregarding the
prior years of service completely (which would require the plan to comply
with ERISA’s “buyback” rules): the participant would be entitled to a per-
centage of the higher salary earned during the second period of employ-
ment not only for the years of the second period, but also for the initial
period. Based on a final salary of $4000/month, for example, the partici-
pant would receive a final benefit (not including the $300/month equiva-
lent already distributed) of $1500/month under this system (1.5% of
$4000/month times 30 years, minus $300/month), instead of $1200/month
(1.5% of $4000/month times 20 years) if the first period of employment
were excluded entirely. The employee would thus accrue some additional
benefit — over the benefit already paid — for the initial years of employ-
ment.
                        MILLER v. XEROX CORP.                        11231
satisfied. Xerox’s approach is the equivalent, in the above
example, of the company seeking to subtract more than the
initial $300/month accrued benefit from the final benefit pay-
ment, on the grounds that the participant could purchase a
larger annuity with the prior distribution amount at the time
of final benefit calculation due to his shorter life expectancy
or changed discount rate assumptions, or assumed investment
returns on the distribution amount. Nothing in the statute or
in logic permits this revisionist approach to already-
distributed accrued benefits, nor is it more permissible in the
context of a floor-offset plan, since such a plan must still sat-
isfy the rules for ordinary defined benefit plans.

   Although no court appears to have addressed the precise
claim presented here, our approach is consistent with that of
other courts of appeals. In Berger v. Xerox Corp. Retirement
Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003), for
example, the Seventh Circuit found that Xerox’s method of
calculating lump-sum distributions under the Cash Balance
Retirement Account component of the Income Guarantee Plan
violated ERISA’s requirement of actuarial equivalency.7
Although the case is not strictly analogous, because it
addressed only the proper calculation of lump sum distribu-
tions under the Cash Balance Retirement Account (not the
“phantom accounting” for prior distributions that the Employ-
ees challenge), our approach is compatible with Berger’s dis-
cussion of the nature of actuarial equivalence, and its
   7
     More recently, the Second Circuit held in Frommert v. Conkright, 433
F.3d 254 (2d Cir. 2006), that Xerox’s phantom account mechanism was
not properly added to the plan until 1998, and that it would constitute an
impermissible reduction of benefits if applied to employees rehired by
Xerox prior to 1998. Id. at 256-57. The Frommert court also required the
district court to reconsider the plaintiffs’ claims of fiduciary breach based
on Xerox’s alleged misrepresentations of the amended plan’s terms. Id. at
257. Although this case presents different issues, and we do not reach the
Employees’ disclosure-related claims, Frommert’s analysis of the Xerox
plan’s broader defects reinforces our own conclusion that Xerox’s phan-
tom account mechanism falls short of ERISA’s requirements.
11232                MILLER v. XEROX CORP.
application of ERISA’s defined benefit plan rules to some-
what murky “hybrid” plans. Id. at 759-60. The same is true of
Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), in
which the Second Circuit reached the same conclusion as Ber-
ger in considering a similar plan.

   Xerox argues that, because participants in the Profit Shar-
ing Plan/Transitional Retirement Account received invest-
ment growth as part of their benefit, it is proper to project that
growth forward to retirement when determining the actuarial
equivalent benefit, just as was done with the Cash Balance
Retirement Account interest credits under that plan in Berger.
However, the Cash Balance Retirement Account interest cred-
its are defined benefit entitlements specified by the plan
terms, and are not analogous to the investment growth of a
defined contribution plan. Unlike the Cash Balance Retire-
ment Account benefits, defined contribution benefits under
the Profit Sharing Plan came with no guarantees, and did not
depend in any way on projected value at retirement; rather,
the plan simply provided participants with the account bal-
ance, whatever it might be. Xerox clearly realized the differ-
ence: although Xerox projected each retiree’s Cash Balance
Retirement Account balance forward to retirement and then
discounted the projected amount to express it as a present-day
lump sum (using too high a discount rate, according to Ber-
ger), the company made no such projections for the Profit
Sharing Plan. Instead, Xerox simply distributed each partici-
pant’s Profit Sharing Plan account balance if — as in the case
of the Employees — it exceeded the lump-sum value of the
Income Guarantee Plan formula benefit.

   [5] The applicable regulations permit a plan to subtract
from a final defined benefit only the “accrued benefit attribut-
able to the [prior] distribution.” Xerox’s “phantom account”
offset exaggerates the amount of “accrued benefit” under the
Income Guarantee Plan attributable to the Employees’ Profit
Sharing Plan distributions, in violation of those regulations,
by deducting from the Employees’ benefits the distribution’s
                    MILLER v. XEROX CORP.                 11233
hypothetical value at final retirement, rather than the benefit
attributable to the distribution itself. The Employees — and
all other plan participants subject to similar benefit adjust-
ments — are entitled to a calculation of benefits that subtracts
from their final Income Guarantee Plan benefit only the bene-
fit actually attributable to the Profit Sharing Plan distribu-
tions.

                              III

   [6] Because Xerox improperly overstated the benefit attrib-
utable to the Profit Sharing Plan distributions the Employees
received in 1983, we reverse the judgment of the district court
and remand for further proceedings consistent with this opin-
ion.

  REVERSED AND REMANDED.