Mutual of New York’s Insurance Company (MONY) sponsored a tax qualified defined benefit retirement plan and also an excess benefit plan, a defined benefit non-qualified plan. Both plans allowed for a lump sum distribution to be taken in lieu of the normal form annuity payment. Mr. Dennison, a participant in both plans, left MONY in 1996. In 2009, 13 years after leaving MONY, Mr. Denison attained age 55 and was eligible to commence receiving benefits from both plans. Mr. Dennison requested lump sum payments from both plans.
The qualified plan had recently been amended to provide that lump sum benefits were no longer calculated using a discount rate based on so called “PBGC interest rates” and instead used so called “segment interest rates.” The use of the segment interest rates was a change required by the Pension Protection Act (PPA). The use of the segment interest rates results in a lower lump sum benefit payment than the old PBGC interest rates would have produced. Mr. Dennison argued that the amendment of the discount rate factors was an impermissible cut-back in his accrued benefit.
The Seventh Circuit upheld the plan’s decision that no cut back benefits had occurred. The court found that the protected accrued benefit under the qualified defined benefit plan was the annuity form of benefit, which had not changed as a result of the amendment. The adoption of the PPA segment interest rates was a change required by law and, under the law and regulations, was a permissible cutback in benefits.
Mr. Dennison had also argued that the terms of the qualified defined benefit plan at the time he separated from employment in 1996 should govern. The court rejected that argument, finding that the amendment to add the PPA segment rates was clearly drafted to apply to people who had terminated at an earlier date.
With respect to the non-qualified excess benefit plan, Mr. Dennison challenged the use of the stated of 7.5 percent discount rate. Again, the 7.5 percent discount rate produced a smaller lump sum benefit than use of a lower rate, such as PBGC interest rates, would produce. The terms of the excess benefit plan did not provide for a specific rate, but rather referred to the terms of the qualified plan. The Seventh Circuit looked at the terms of the qualified defined benefit plan and determined that the document discussed the use of PBGC rates and segment rates for benefits subject to IRC § 417(e). IRC § 417(e) provides for a floor on the amount that can be paid as a lump sum benefit in a qualified plan. The court rejected Mr. Dennison’s position, finding that because the excess plan was a non-qualified plan, it was not subject to the rules of IRC § 417(e). Thus, the default interest rate under the qualified plan of 7.5 percent was the rate that was appropriate to use. The court also found that the plan had used this rate consistently over many plan years and therefore any ambiguity in the plan was resolved by the administrator’s consistent use of the 7.5 percent interest rate. (Dennison v. MONY Life Retirement Income Security Plan for Employees, 7th Cir., 2013).