In 1991, the sponsor of a pension plan amended the plan to offer a lump sum distribution as an optional form of benefit, but excluded from the calculation of lump sums the actuarial value of cost-of-living adjustments (COLAs) that would have been applicable to the same pension benefit when distributed in the form of an annuity. Plan participants who received lump sum payouts and did not receive the economic value of the COLA in their lump sum distributions sued the plan sponsor, claiming that the failure to treat the COLA as part of the accrued benefit is a violation of ERISA. A federal district court, on the matter of liability, ruled in favor of the participants, holding that the lump sum must be actuarially equivalent to the accrued benefit, which includes the COLA. The court held that because any annuitant at normal retirement age will receive a set monthly payment that will increase according to a COLA throughout the annuitant’s lifetime, the COLA is part of the accrued benefit. In reaching its conclusion, the court rejected the notion that the COLA might be either an ancillary benefit or a retirement-type subsidy. While the court held the plan is liable to the affected participants because it did not provide the lump sum equivalent of the full accrued benefit, the remedies were not established by the court and will be determined in a separate proceeding. Pikas v. Williams Companies Inc. (N.D. Okla. 2012)
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Plan cannot exclude COLA from lump sum payouts of accrued benefits
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