In McCorkle v. Bank of America Corp., decided on July 25, 2012, the U.S. Court of Appeals for the Fourth Circuit affirmed the district court’s dismissal of claims that a cash balance pension plan sponsored by Bank of America (the “Plan”) violated the requirements for defining normal retirement age and the benefit accrual and disclosure rules under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Two aspects of the decision are noteworthy. The court found that ERISA’s anti-backloading requirements do not apply to benefit accruals earned by participants who have reached normal retirement age (“NRA”) under the plan. The court also found that ERISA does not require a summary plan description (“SPD”) to use “technical terms of art.”
“Whipsaw” Liability and the Plan’s Definition of Normal Retirement Age
For the relevant years, the Plan defined NRA as “the first day of the calendar month following the earlier of (i) the date the Participant attains age sixty-five (65) or (ii) the date the Participant completes sixty (60) months of Vesting Service.” This definition had been chosen to avoid “whipsaw” liability with respect to lump sum distributions, which refers to the possibility that the lump sum benefit for a participant who receives benefits before NRA would exceed the value of the participant’s hypothetical account because of the manner in which lump sum distributions had to be calculated during the relevant years. (The value of a participant's benefit under a cash balance pension plan is based on a hypothetical account to which the employer allocates both pay and interest credits.) Prior to the enactment of the Pension Protection Act of 2006 (“PPA”), a cash balance pension plan was required to calculate a lump sum distribution for a participant who had not reached NRA by projecting the hypothetical balance forward to NRA using the plan’s interest crediting rate and discounting the benefit back to the date of distribution using the interest rate prescribed by the Internal Revenue Code (“Code”). If the plan’s interest crediting rate exceeded the Code interest rate, the resulting lump sum distribution would exceed the participant’s hypothetical account balance. Plan benefits vested at the same time that participants attained NRA (after five years of vesting service), so participants who departed the Plan before attaining NRA were not entitled to lump sum distributions and whipsaw liability was thereby avoided.
The plaintiffs in McCorkle, who represented a class of current and former Plan participants, alleged that the Plan’s definition of NRA and calculation of lump sum benefits violated ERISA. They argued that NRA must be defined by reference to an age, not service, and that the Plan should therefore have calculated lump sum benefits using a presumptive NRA of age 65.
Relying on a case from the Seventh Circuit Court of Appeals, the Fourth Circuit rejected the plaintiffs’ contention that the Plan’s definition of NRA violated ERISA. Because the Plan’s definition of NRA was valid, the Plan’s method of calculating lump sum benefits was also valid.
The court limited its holding that NRA may be based on years of service to periods before the effective date of the final regulations with respect to NRA issued by the Internal Revenue Service (“IRS”) in 2007.
ERISA’s Anti-Backloading Test
The McCorkle plaintiffs’ next claim was based on a benefit accrual rule - the anti-backloading requirement applicable to defined benefit pension plans, which provides that the annual rate at which a participant accrues retirement benefits payable at NRA in any given year must not be more than the 133 1/3 percent of the annual rate at which he or she accrued benefits in the previous year. The anti-backloading requirement is intended to discourage employers from concentrating benefit accruals in later years of service. The Plan's formula for crediting hypothetical participant accounts gave greater credits to participants who had reached NRA, thereby providing more substantial benefit accruals to participants who had higher levels of service.
Relying on IRS guidance issued in connection with changes to the regulations on NRA that were not effective during the time period relevant to the case, the plaintiffs contended that the Plan’s benefit accrual formula and NRA violated ERISA’s anti-backloading requirement. The court, having already concluded that the Plan’s definition of NRA complied with ERISA, found that the anti-backloading requirement does not apply to benefit accruals after NRA.
Disclosure of the Plan’s Definition of Normal Retirement Age
The McCorkle plaintiffs’ final argument was that the Plan’s SPD affirmatively misled participants by describing a NRA different from that actually used by the Plan. (The Plan’s SPD did not use the term “normal retirement age” in describing the Plan’s vesting and benefit eligibility requirements.)
The court found that ERISA does not require SPDs to use technical terms of art such as “normal retirement age”: “To the contrary, ERISA’s implementing regulations clearly require an SPD to ‘be written in a manner calculated to be understood by the average plan participant’… Accordingly, the SPD should usually ‘limit[ ] or eliminate[e] … technical jargon.’”