Definition of Participant Governs Nonqualified Plan Payments

A group of retirees should not have received a lump-sum payment from a nonqualified plan at a change in control because they were not “participants” as defined by the plan.

A federal appellate court found three retirees of Bausch & Lomb were not “participants” as defined in its nonqualified plan for executives and, therefore, not subject to the change-in-control provisions of the plan.

The retirees sued Bausch & Lomb because their recurring payments from the plan were stopped and they were paid a lump-sum of their remaining account value, which they contended reduced their overall benefits.

The 2nd U.S. Circuit Court of Appeals agreed with a lower court that since the plan defines “retired participant” separately from “participant,” and since the change-in-control provision of the plan only applies to “participants,” the retirees should not have received a lump-sum distribution upon a change in control of the company. The plan defined “participant” as “an employee of the company who has been selected to participate in the plan,” while “retired participant” was defined as “a former participant who is receiving benefits under this plan.” The court noted that retired participants are no longer “employee[s] of the company,” as is required to be a participant, and a retired participant, as a matter of logic, cannot be both a “former Participant” and a current participant.

In addition, the court pointed out that the change-in-control section of the plan provides that, for purposes of determining the participant’s accrued benefit, the date of the change of control will act as a stand-in for the date of termination of employment. The retirees already had a date of termination and did not need a stand-in date.

The 2nd Circuit affirmed a lower court’s ruling that Bausch & Lomb misinterpreted the change-in-control provision of the plan.

As a remedy, the lower court allowed for the retirees to keep their lump-sum payments but have monthly payments reinstated at a lower amount in consideration of the lump sum. The 2nd Circuit found that the district court’s remedy does not run afoul of the principle, announced by the U.S. Supreme Court in CIGNA Corp. v. Amara, that a district court has no authority to “reform” an Employee Retirement Income Security Act (ERISA) plan. The court said the only relief ordered by the district court—reinstatement of monthly benefit payments that Bausch & Lomb had unlawfully stopped—was explicitly called for by the plan itself. In addition, the appellate court said the district court’s practical measure of a “credit” in the amount of the lump sum is a traditional application of the remedy of contractual expectation damages—ensuring that plaintiffs are restored to the same financial position they would have been in, but for Bausch & Lomb’s breach.

The decision in Gill v. Bausch & Lomb is here.