Laurent v. PricewaterhouseCoopers LLP

794 F.3d 272

Timothy D. LAURENT, Smeeta Sharon, Plaintiffs–AppelleesMichael A. Weil, Plaintiff

v.PRICEWATERHOUSECOOPERS LLP, The Retirement Benefit Accumulation Plan for Employees of Pricewaterhousecoopers LLP, The Administrative Committee to the Retirement Benefit Accumulation Plan for Employees of Pricewaterhousecoopers LLP, Defendants–Appellants.^*

Docket No. 14–1179.

United States Court of Appeals, Second Circuit.

Argued: April 14, 2015.

Decided: July 23, 2015.

Daniel J. Thomasch, Gibson, Dunn & Crutcher LLP, New York, N.Y., (Richard W. Mark, Amer S. Ahmed, Gibson, Dunn & Crutcher LLP, New York, N.Y.; Robert J. Kopecky, Kirkland & Ellis LLP, Chicago, IL, on the brief), for defendants-appellants.

Julia Penny Clark, Bredhoff & Kaiser, PLLC, Washington, DC (Eli Gottesdiener, Gottesdiener Law Firm, PLLC, Brooklyn, N.Y., on the brief), for plaintiffs-appellees.

Before CABRANES, LYNCH, and DRONEY, Circuit Judges.

Opinion

GERARD E. LYNCH, Circuit Judge:

The Employee Retirement Income Security Act of 1974 (“ERISA”), as amended 29 U.S.C. § 1001 et seq., protects retirement benefits that have accrued over the course of an employee's tenure until that employee reaches normal retirement age. The question in this case is how much leeway retirement plan sponsors have to define what “normal retirement age” is, in order to avoid paying future interest credits when the employee leaves employment and elects to receive the value of his or her retirement account in a lump-sum distribution. Plaintiffs, former employees of PricewaterhouseCoopers LLP (“PwC”), sued the company and its retirement plan, alleging that the plan violated ERISA. The plan defines “normal retirement age” as five years of service, so that it coincides with the time at which employees vest in the plan. Plaintiffs allege that this scheme deprives them of so-called “whipsaw payments,” which guarantee that plan participants who take distributions in the form of a lump sum when they terminate employment will receive the actuarial equivalent of the value of their accounts at retirement.

Defendants moved to dismiss the complaint. The district court (J. Paul Oetken, Judge ) denied the motion to dismiss, holding that the PwC plan violated ERISA because (1) five years of service is not an “age” under ERISA, (2) the plan violated ERISA's anti-backloading rules, and (3) the plan's documents violated ERISA's notice requirements. It then certified its decision for interlocutory review, and we accepted the certification. We agree that the plan violates ERISA, but for different reasons than those cited by the district court.¹ We hold that the plan's definition of “normal retirement age” as five years of service violates the statute not because five years of service is not an “age,” but because it bears no plausible relation to “normal retirement,” and is therefore inconsistent with the plain meaning of the statute. We accordingly AFFIRM, without reaching the district court's alternative reasons for denying defendants' motion to dismiss.

BACKGROUND

Before discussing plaintiffs' suit and the issues raised on appeal, it is necessary to provide some background on ERISA and how its minimum vesting provisions apply to the kind of plan that PwC offers its employees, in order to clarify the framework in which those issues must be analyzed.

I. ERISA's Vesting Requirements for Cash Balance Plans

Congress passed ERISA in response to findings that inadequate vesting protections in private retirement plans were causing retirees to lose their anticipated benefits. See 29 U.S.C. § 1001(a). The statute addresses that problem largely by imposing various requirements on plans as a condition for receiving preferential tax treatment. ERISA recognizes two basic types of retirement plans: defined contribution plans (also known as individual account plans) and defined benefit plans. A defined contribution plan is “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.” ERISA § 3(34);² 29 U.S.C. § 1002(34). By contrast, a defined benefit plan consists of a general pool of assets, which may be funded by employer or employee contributions, or a combination of both, and guarantees a defined level of benefits, known as accrued benefits, which are “expressed in the form of an annual benefit commencing at normal retirement age.” ERISA § 3(23)(A); 29 U.S.C. § 1002(23)(A) ; see Lonecke v. Citigroup Pension Plan, 584 F.3d 457, 461–62 (2d Cir.2009).

In order to qualify as ERISA-compliant, retirement plans must meet the statute's “[n]onforfeitability requirements.” See ERISA § 203(a); 29 U.S.C. § 1053(a). Those requirements are minimum vesting standards mandating that “[e]ach pension plan shall provide that an employee's right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age.” Id. In addition, specifically for defined benefit plans, a plan satisfies the nonforfeitability requirements if, inter alia, “an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.” 29 U.S.C. § 1053(a)(2)(A)(ii). Thus, to satisfy ERISA, a defined benefit plan must allow an employee's interest in his or her accrued benefit to vest fully when the employee has completed five years of service with the employer.³

Two statutory definitions are critical to understanding this vesting requirement: First, as noted, under the Act, “accrued benefit” means, “in the case of a defined benefit plan, the individual's accrued benefit determined under the plan and ... expressed in the form of an annual benefit commencing at normal retirement age.” Id. § 1002(23)(A). Second, the Act defines “normal retirement age” as “the earlier of (A) the time a plan participant attains normal retirement age under the plan, or (B) the later of (i) the time a plan participant attains age 65, or (ii) the 5th anniversary of the time a plan participant commenced participation in the plan.” Id. § 1002(24). In plain English, this means that an employee's accrued benefit is the amount she would receive annually as an annuity after she reaches normal retirement age, and normal retirement age is the earlier of a normal retirement age selected by the plan or a statutory default, which is usually age 65, unless the employee begins participating in the plan later than age 60, in which case normal retirement age is five years from that date.

In the 1980s and '90s, many companies created a third type of plan, known as a “cash balance” plan. Cash balance plans combine attributes of both defined contribution and defined benefit plans. They simulate the structure of defined contribution plans, but they are treated as defined benefit plans. Under cash balance plans, “employers do not deposit funds in actual individual accounts, and employers, not employees, bear the market risks.” Hirt v. Equitable Ret. Plan for Emps., Managers, & Agents,

533 F.3d 102, 105 (2d Cir.2008). Instead of an actual individual account, a participant in a cash balance plan has a hypothetical account, the value of which is “driven by two variables: (1) the employer's hypothetical ‘contributions,’ and (2) hypothetical earnings expressed as interest credits.” Esden v. Bank of Boston, 229 F.3d 154, 158 (2d Cir.2000). For this reason, “[c]ash balance plans are considered defined benefit plans under ERISA.” Lonecke, 584 F.3d at 462. “As a result of this classification, the term ‘accrued benefit’ in a cash balance plan is expressed in the form of an annual benefit commencing at normal retirement age,” just like the accrued benefit in a defined benefit plan. Id. (internal quotation marks, citations, and alteration omitted); see also Berger v. Xerox Corp. Ret. Income Guarantee Plan, 338 F.3d 755, 757–58 (7th Cir.2003) ; Esden, 229 F.3d at 158.

Generally with cash balance plans, interest credits continue to accumulate even after an employee terminates employment and until the benefits are distributed. See Esden, 229 F.3d at 160. Thus, if a vested employee leaves employment before reaching retirement age, his or her benefit at retirement will be based on the contributions made during employment, plus the interest accruing over time, both during employment and between the employee's departure and retirement age. In a cash balance plan, the employer may offer the departing employee the option of either an annuity or a lump sum; however, “any such [lump-sum] payout must be worth at least as much, in present terms, as the annuity payable at normal retirement age.” Lonecke, 584 F.3d at 463 (internal quotation marks omitted); accord, Esden, 229 F.3d at 163. In other words, plans are not required to offer participants a lump-sum distribution, but if they do, they cannot deprive the participants of the value that would accrue if the participants waited and took their distributions as an annuity at normal retirement age.

The difference between the hypothetical value of a cash balance plan account at any given time and the value of the account as an annuity payable at normal retirement age is known as the “whipsaw calculation.”⁴ To determine the whipsaw calculation, the account balance is increased by the plan's interest rate multiplied by the time to normal retirement age, then discounted back to present value at a set rate, usually the rate on 30–year Treasury securities. See Esden, 229 F.3d at 159, 164 n. 13. Assume, for example, that a benefit plan's normal retirement age is 65 and a 64–year–old employee has an account balance of $100,000. Assume further that the plan provides a corporate bond rate of return, which today is 8%—a rate that is 2% higher than the current Treasury rate of 6%. To determine the whipsaw-calculated lump sum, or “whipsaw payment,” one increases the account balance by today's corporate bond rate, to get...