Law Firm Did Not Violate ERISA Anti-Cutback Rule

Paying a lump-sum distribution from a cash balance plan that was half of what a participant would have received if the plan had not been terminated was not a violation of the Employee Retirement Income Security Act’s (ERISA) anti-cutback rule, a court has ruled. 

The U.S. District Court for the District of Columba ruled concluded the law firm Feder Semo & Bard P.C. did not violate the anti-cutback rule when it terminated its cash balance plan and paid former law partner Denise M. Clark a lump-sum distribution that was approximately half of the present value of her straight life annuity. The court said Clark’s claim did not involve the type of benefit reduction the anti-cutback rule protects.

In her statement detailing her claim, Clark contended that Feder Semo improperly grouped her for purposes of her account credit, thereby understating her retirement benefits by 41%. She also claimed that Feder Semo violated ERISA’s anti-cutback rule, 29 U.S.C. § 1054(g), when it proportionately reduced the aggregate amount distributed to plan participants to match the plan’s assets.

Additionally, she contended that defendants violated ERISA’s disclosure requirements by failing to disclose the consequences of a plan termination and the plan’s lack of insurance. She also argued that the retirement plan’s fiduciaries failed to use a reasonable actuarial assumption for interest that caused the plan to be underfunded. And, she contends that the retirement plan’s fiduciaries failed to comply with the distribution restrictions in Treas. Reg. 1.401(a)(4)-5 with the effect of reducing the benefits received by most plan participants.

While the court ruled against Clark on her anti-cutback claim, it said she could continue with her claim alleging she was improperly grouped with a class of employees that received smaller percentage credits from the plan. However, the court said Clark had to decide whether to pursue this claim under ERISA Section 502(a)(1)(B) or Section 502(a)(3).

The court rejected Feder Semo's argument that Clark could not pursue this claim under Section 502(a)(3) because she was seeking monetary relief for a fiduciary breach, not “appropriate equitable relief.”

Clark was an attorney at Feder Semo for approximately 10 years. While working for the firm, she participated in the firm's cash balance plan, which was terminated in 2005.

Clark was given the option of receiving her benefits in the form of a straight life annuity commencing at her normal retirement date, or as a lump-sum distribution. Feder Semo determined although the lump-sum actuarial equivalent of Clark's straight life annuity would be $312,381, she would be paid only $166,542 because the plan did not have enough assets to cover lump-sum distribution requests. Clark elected to receive her benefits as a lump sum, but reserved the right to pursue any difference between the distribution and the full value of her accrued benefit.

In 2007, Clark sued the firm. Among other things, Clark argued she was improperly classified in “Group C” rather than “Group B,” which resulted in the receipt of smaller percentage credits from the plan. Clark further alleged that Feder Semo violated the anti-cutback rule by paying only 53% of the lump-sum actuarial equivalent of her straight life annuity.

Clark also contended Feder Semo violated ERISA's disclosure requirements by failing to disclose in the SPD the consequences of a plan termination, among other things.

In addition, Clark claimed Feder Semo breached its ERISA fiduciary duties by using actuarial assumptions that overlooked the fact that most plan participants opted to receive their benefits in lump-sum payouts rather than as straight life annuities.

In a previous decision, the court ruled for the firm on the anti-cutback claim. The court, however, revived the anti-cutback claim in September 2010.

Once again ruling for Feder Semo on Clark's anti-cutback claim, the court said it was persuaded by the firm's argument that Clark received less than the full amount of her accrued benefit because of the plan's underfunding and the plan's termination provision, which permitted the pro rata distribution of available benefits. The court said Clark could not point to any plan terms that were changed as a result of the plan termination.

Moreover, Clark did not cite any cases in which the termination of an underfunded plan triggers the anti-cutback rule, the court added.

The court also ruled Clark could continue with her “improper grouping” claim. While Clark brought this claim under ERISA Section 502(a)(1)(B) against the plan and under ERISA Section 502(a)(3) against the plan's fiduciaries for breach of fiduciary duty, the court said Clark could not move forward under both sections.

The court disagreed with Clark that she should be able to pursue her claim under both sections because, due to the lack of plan assets, she would be left without an adequate remedy under Section 502(a)(1)(B).

However, the court also was not swayed by Feder Semo's argument that Clark could not proceed under Section 502(a)(3) because she was seeking to impose liability for money damages. The court said that under Amara, certain forms of monetary relief, such as “surcharge,” may qualify as traditional equitable relief.

Turning to Clark's claim of a deficient SPD, the court said Clark could proceed against the firm on her own behalf under Section 502(a)(3), but she could not proceed against the plan under Section 502(a)(1)(B), based on Amara's finding that an SPD is not part of a plan. Clark also could not proceed with this claim on behalf of the plan under Section 502(a)(2), as the causal link between the alleged breach and the loss to the plan was “too attenuated,” the court added.

In addition, the court said Clark could pursue her claim that Feder Semo breached its fiduciary duties by using improper actuarial and interest rate assumptions to fund the plan, as genuine disputed issues of fact remained.

Finally, the court ruled for Feder Semo on Clark's claim that the fiduciaries impermissibly permitted distributions to the firm's founder and his wife.

The case is Clark v. Feder Semo Bard P.C., D.D.C., No.: 107-cv-00470-JDB.