Royal Oak Enterprises, LLC v. Pension Benefit Guaranty Corporation

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ROYAL OAK ENTERPRISES, LLC,
Plaintiff,
v. Civil Action No. 13-1040 (GK)
PENSION BENEFIT GUARANTY
CORPORATION,
Defendant.
MEMORANDUM OPINION
Royal Oak, LLC ("Royal Oak," "Plaintiff" or "the Company")
brings this action to challenge an Order by the Pension Benefit
Guaranty Corporation ("PBGC," ~Defendant," or "the Agency") . 1 On
October 31, 2008, Royal Oak terminated the pension plan ("the
Pland) it had previously operated for the benefit of its
employees under the Employee Retirement Income Security Act of
1974 ("ERISA"), 29 U.S.C. § 1001, et seq. After the Plan's
termination date, Royal Oak changed the method it used to
calculate certain payments to Plan participants. As a result of
the change, the participants received approximately $2.1 million
less than they would have been paid under the terms of the Plan
as written on October 31, 2008.
1
The PBGC is an agency as defined by the Administrative
Procedure Act. See 5 U.S.C. § 551(1); 29 U.S.C. § 1302.
1
The PBGC, which administers Title IV of ERISA, 29 U.S.C.
§§ 1301-1461, performed an audit of Royal Oak's pension plan
termination. The Agency determined that Royal Oak had improperly
decreased the value of plan benefits after the Plan's
termination and Ordered Royal Oak to make additional payments to
Plan participants.
On July 9, 2013, Royal Oak filed its Complaint seeking
judicial review of the PBGC' s Order. [Dkt. No. 1]. On September
16, 2013, the PBGC filed its Answer and a Counterclaim seeking
enforcement of its Order. [Dkt. No. 11]. On January 22, 2014,
both parties submitted their respective Motions for Summary
Judgment, [Dkt. Nos. 19, 20], and thereafter, their Oppositions,
[Dkt. Nos. 21, 22], and Replies, [Dkt Nos. 23, 24]. On April 8,
2014. With the Court's permission, the PBGC filed a Surreply.
[Dkt. No. 30]. For the reasons set forth below, Royal Oak's
Motion for Summary Judgment shall be denied, and the PBGC' s
Motion for Summary Judgment shall be granted.
I. BACKGROUND
A. Statutory Framework
1. Overview of ERISA
Congress enacted ERISA to provide minimum standards that
would assure the equitable character and financial soundness of
employee pension plans. See 29 U.S.C. § 1001(c); Pension Ben.
Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 720 (1984). ERISA
2
aims "to increase the likelihood that participants and
beneficiaries under single-employer defined benefit pension
plans will receive their full benefits." 29 u.s.c.
§ 10 0 lb (c) ( 3) .
ERISA's four Titles serve distinct functions within the
statutory regime. Title I establishes the reporting and
disclosure, participation and vesting, funding, and fiduciary
obligations provisions pertaining to ongoing pension plans. See
29 U.S.C. §§ 1001-1191c.
Title II, codified within the Internal Revenue Code
("I. R. C.") , relates to the qualification ·of pension plans for
favorable tax treatment. See I.R.C. §§ 401-424.
Title III provides for coordination of jurisdictional,
administrative, and enforcement issues among the PBGC, the
Internal Revenue Service ("IRS") , and the Department of Labor.
See 29 U.S.C. §§ 1201-1242.
Finally, Title IV sets forth the rules governing
termination of defined benefit plans, including mandatory
procedures for terminating covered plans and distributing their
assets, as well as termination insurance to pay pension benefits
under covered plans that terminate without sufficient assets to
pay those benefits. See 29 U.S.C. §§ 1301-1461.
The plan termination procedures of Title IV are the
exclusive means of terminating a defined benefit pension plan.
3
See 29 U.S.C. § 1341 (a) (1). Under Title IV, it is the employer
who determines whether to terminate a plan, controls the
execution of all plan amendments necessary for termination, and,
through its chosen plan administrator, sets the plan's
termination date. See, e.g., Beck v. Pace Int'l Union, 551 U.S.
96, 101-02 (2007); 29 U.S.C. §§ 1341 (a) (2), 1348 (a) (1). Title IV
also establishes the PBGC and charges it with enforcing and
administering that Title's provisions. 29 U.S.C. § 1302.
2. Standard Terminations
When an employer decides to terminate a defined benefit
pension plan by way of a standard termination 2 it must first
choose a termination date. See 29 U.S.C. § 1341 (a) (2); 29 C.F.R.
§ 4041.23. A "plan's termination date is significant in both
voluntary and involuntary [pension plan] termination
proceedings." Pension Ben. Guar. Corp. v. Broadway Maint. Corp.,
707 F.2d 647, 649 (2d Cir. 1983). It is the date on which all
benefit accruals cease, and as of which all benefits owed to
plan participants are determined. See 29 U.S.C. § 1341 (b) (1) (D)
(mandating that plan liabilities be determined as of the plan's
termination date) ; Pension Ben. Guar. Corp. v. Republic Techs.
A "standard termination" under 29 U.S.C. § 1341 (b)
identifies a plan with sufficient asse.ts to cover its
liabilities, whereas a "distress termination" under 29 u.s.c.
§ 1341 (c) identifies a plan which lacks sufficient assets to
cover its liabilities.
4
Int'l, LLC, 386 F.3d 659, 662 (6th Cir. 2004) (citing Broadway
Maint. Corp., 707 F.2d at 649).
The plan administrator must notify all plan participants,
beneficiaries, 3 alternate payees, and employee organizations
representing plan participants of the plan's termination date
and provide them with an explanation of the benefits to which
they are entitled. See 29 U.S.C. §§ 1341 (a) (2), (b) ( 1) '
(b) (2) (B); 29 C.F.R. §§ 4041.23, 4041.24. Before distributing
the plan's assets, the administrator must also file the Standard
Termination Notice-PBGC Form 500 ("Form 500") to notify the PBGC
of the termination date and provide detailed information about
the plan's assets and benefit liabilities. See 29 U.S.C.
§ 1341 (b) (2) (A), 29 C. F.R. § 4041.25.
Once the PBGC has received the Form 500, the Agency has 60
days to determine whether there is "reason to believe" that the
plan has insufficient assets to pay benefit liabilities. 29
U.S.C. § 1341 (b) (2) (C). To reach its determination, the PBGC
relies, in part, upon the plan administrator's calculation of
the actuarial present value of the plan's benefit liabilities as
of the proposed termination date. 29 U.S.C. § 1341 (b) (2) (A).
3
This Opinion uses "participant" and "beneficiary"
interchangeably throughout to describe persons who have or
should have received payment from the single-employer defined
pension benefit plan that is the subject of this litigation.
5
3. Distribution of Benefits
If the PBGC determines that there is no reason to believe
that the plan has insufficient assets to pay benefit
liabilities, the plan administrator must distribute the plan's
assets pursuant to Title IV of ERISA. 29 u.s.c.
§ 134l(b) (2)&(3); 29 C.F.R. § 4041.28.
Administrators generally may distribute benefits to plan
participants in the form of annuities or lump-sum payments "in
accordance with the provisions of the plan and any applicable
regulations." 29. U.S.C. § 1341(b) (3) (A) (ii). A participant's
plan benefits "are determined under the plan's provisions in
effect on the plan's termination date." 29 C.F.R. § 4041.8.
Post-termination amendments are permissible only under narrow
circumstances -- so long as the amendment does not decrease the
value of a participant's benefits or is necessary to meet the
qualification requirements imposed by I.R.C. § 401. Id.
4. Calculating Lump-Sum Payments
In order to calculate the dollar value of lump-sum
payments, the plan administrator must find the present value of
each participant's accrued benefits. That is, the administrator
must use assumptions about mortality and interest rates to
calculate the value of a lump-sum payment that will, in an
actuarial sense, equal the value of monthly pension payments
each plan participant is entitled to receive. See I.R.C.
6
§ 401 (a) (25); 29 C. F.R. §4041.28. The interest rate used to
calculate the present value of accrued benefits is inversely
related to the value of the lump sum (i.e., higher interest
rates yield smaller lump-sum payments).
The power of compounding interest and the long-term nature
of pension obligations mean that even a slight change in the
interest rate can have a significant impact on the size of the
lump-sum payments. Thus, mortality and interest rate assumptions
must be specified in the plan and may not be left to the
employer's discretion. I.R.C. § 401 (a) (25). Plans are not bound
to adopt any particular set of actuarial assumptions. Instead,
the present value of lump sums calculated according to the
plan's terms "shall not be less than the pr~sent value
calculated by using" the mortality table and interest rate
4
specified in I.R.C. § 417 (e) (3). In effect, I.R.C. § 417 (e) puts
a floor but not a ceiling on the value of lump-sum
payments.
Congress first enacted § 417 (e) (3) 's minimum present value
requirement in 1984 and has amended its applicable interest rate
and mortality assumptions three times since then. See Retirement
Equity Act of 1984, Pub. L. No. 98-397, 98 Stat. 1426, § 203(b)
(1984); Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat.
4
A parallel provision also appears in Title I of ERISA. 29
u.s.c. § 1055(g).
7
2085, § 1139 (b) (1986); Retirement Protection Act of 1994, Pub.
L. No. 103-465, 108 Stat. 4809, § 767 (a) (1994); Pension
Protection Act of 2006, Pub. L. No. 109-280, 120 Stat 780,
§ 302(b) (2006).
From 1986 to 1994, PBGC regulations set the applicable
interest rates, but in 1994, Congress amended the statute to
explicitly prescribe the applicable assumptions. See Retirement
Equity Act of 1984, Pub. L. No. 98-397, 98 Stat. 142 6, § 203(b)
(1984); Retirement Protection Act of 1994, Pub. L. No. 103-465,
108 Stat. 4809, § 767 (a) (1994). Generally, the 1994 version of
I.R.C. § 417(e) called for plan administrators to calculate
minimum lump-sum payments using the interest rate on 30-year
Treasury securities and the mortality assumptions contained in
the 1994 Group Annuity Reserve Table ("1994 GAR Table") .
Collectively, the 1994 actuarial assumptions are known as the
"GATT Structure."
5. Pension Protection Act of 2006
Congress most recently updated the minimum present value
assumptions in the Pension Protection· Act of 2006 ("PPA").
Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat
780, § 302 (b) (2006). The new actuarial assumptions ("PPA
Assumptions," "PPA Structure," or "§ 417 (e) assumptions")
generally result in smaller minimum lump-sum payments than those
under the previous GATT Structure. Pension Ben. Guar. Corp. v.
8
Kentucky Bancshares, Inc., No. 14-5573, 2015 WL 221621, at *1
(6th Cir. Jan. 15, 2015).
6. Anti-Cutback Provisions and PPA § 1107
Parallel "anti-cutback" provisions in Title I of ERISA and
the I. R. C. prohibit amendments that reduce plan participants'
accrued benefits. See I.R.C. § if11(d) (6); ERISA § 204(g), 29
U.S.C. § 1054(g). Recognizing that some sections of the PPA
might require plan amendments that would otherwise violate the
anti-cutback provisions, Congress explicitly provided relief
from ERISA § 204 (g) and I.R.C. § 411 (d) (6), and offered plan
administrators a grace period to take advantage of that relief.
PPA § 1107.
Under PPA § 1107, if a plan administrator amends a pension
plan in order to comply with the PPA, "(1) [the] pension plan or
contract [he or she administers] shall be treated as being
operated in accordance with the terms of the plan during the
[grace period] . and (2) such pension plan shall not
fail to meet the requirements of section 411(d) (6) of the
[I.R.C.] and ·section 204(g) of [ERISA] by reason of such
amendment." PPA § 1107.
PPA § 1107 only applies if plan administrators observe
certain requirements. First, any amendment must be made "on or
before the last day of the first plan year beginning on or after
January 1, 2009." PPA § 1107 (b) (1). Second, the amendment must
9
apply retroactively to the grace period and the plan must have
been operated "as if such . amendment were in effect" during
the grace period. PPA § 1107 (b) (2).
Notably, PPA § 1107 does not provide relief from the plan
termination procedures in Title IV of ERISA and its implementing
regulations.
B. Factual and Procedural Background5
On January 1, 1971, Royal Oak, a Delaware limited liability
company, adopted a defined benefit pension plan ("the Plan") for
its hourly and salaried employees.
On August 27, 2008, Royal Oak sent Plan participants notice
of the Company's intent to terminate ("NOIT") the Plan. The NOIT
established October 31, 2008 as the Plan's termination date.
Section 5. 02 of the Plan gave the participants a choice
between receiving the remainder of their benefits in a lump sum
or an annuity. The vast majority of Plan participants chose to
receive a lump-sum payment which, pursuant to the Plan's terms
5
Pursuant to Local Civil Rule 7(h), "[i]n determining a
motion for summary judgment, the Court may assume that facts
identified by the moving party in its statement of material
facts are admitted, unless such a fact is controverted in the
statement of genuine issues filed in opposition to the motion."
The parties have filed Cross-Motions for Summary Judgment. The
Court thus takes these facts from the parties' Statements of
Material Facts Not in Dispute. Furthermore, since this case
calls for review of an administrative agency's decision, the
Court relies only on facts contained in the Administrative
Record ( "AR") . Unless otherwise noted, the Court states only
uncontroverted facts.
10
in Section 5.02, would "be the Actuarial Equivalent of the
Participant's Accrued Benefit." 6 On October 31, 2008, Plan
Section 1.02 provided that lump-sum payments would be calculated
twice using two different sets of actuarial assumptions: 1) the
Plan's own chosen interest rate and mortality table; and 2) the
minimum-lump-sum assumptions provided by the GATT Structure. 7
Section 1. 02 specified that each participant would be paid in
accordance with "whichever [set of assumptions] produce [ d] the
larger benefit[.]"
On December 5, 2008, just over a month after the Plan's
termination date, Royal Oak amended Section 1.02's lump-sum
calculation method (the "PPA Amendment") . Under the PPA
Amendment, lump sums would no longer be calculated using the two
methods described above. Instead, lump-sum payments would be
computed using only the interest rates and mortality tables
provided in the PPA and codified at I.R.C. § 417(e). The PPA
6
Royal Oak's submission to the PBGC stated that 328 of the
Plan's 361 participants had elected to receive lump-sum
payments. Def.' s Stmt. 29
U.S. C. § 1303 (a) (requiring the PBGC to audit a statistically
significant number of terminations to determine if all
participants received the benefits to which they were entitled).
On March 16' 2012, the PBGC issued its initial
determination. The Agency found that the post-termination PPA
Amendment violated one of Title IV' s implementing regulations,
29 C.F.R. § 4041.8, because it decreased the value of benefits
provided to Plan participants and beneficiaries receiving lump-
sum payments. Section 4041.8 of the implementing regulations
does permit post-termination benefit-decreasing amendments that
are necessary to meet specific tax code requirements. I. R. C. §
401; 29 C.F.R. § 4041.8. However, the PBGC also found that the
decrease imposed by the PPA Amendment was not necessary for tax
code compliance. Accordingly, the PBGC ordered Royal Oak to
recalculate the lump-sum payments and make additional
distributions to Plan participants and beneficiaries as follows:
13
Recalculate the participants' lump sum value using the (1)
plan rate [ 7. 00%] and the UP-8 4 Mortality Table; ( 2) 30-
year Treasury rate in effect for November 2008 [4.00%] and
the 94 GAR Mortality Table; and (3) November 2008 segment
rates in effect for the 2009 Plan Year . and the 2009
PPA Mortality Table. Participants are entitled to the
highest amount. Add interest to the additional
benefits due using a reasonable interest rate. . [Pay]
the additional benefits to affected participants. AR-0724. 8
On April 30, 2012, Royal Oak requested reconsideration of
the PBGC's initial determination. First, Royal Oak argued that,
by operation of § 1107 of the Pension Protection Act of 2006,
the PPA Amendment was not a post-termination amendment at all.
Instead, the Amendment was retroactively effective as of January
1, 2008, and therefore, in effect on the termination date,
October 31, 2008. Second, Royal Oak argued that even if the PPA
Amendment was a post-termination amendment, it complied with 29
C.F.R. § 4041.8 because it did not decrease benefits and was
necessary to meet requirements under I.R.C. § 401(a).
On July 7, 2013, the PBGC issued a letter upholding its
initial determination. The PBGC reiterated its Order that Royal
Oak recalculate the lump-sum payments and make additional
distributions.
8
The first two methods of calculation are from Plan Section
1.02 as it appeared on October 31, 2008. AR-0133-0134. The third
method employs the assumptions adopted by the PPA Amendment,
which are also codified at I.R.C. § 417(e). Regardless of
whether the PPA Amendment was in effect on October 31, 2008, the
§ 417 (e) assumptions provide a statutory floor on the value of
lump-sum payments. I.R.C. §§ 401(a), 417(e).
14
On July 9, 2013, Royal Oak filed its Complaint, which asks
the Court to declare the PBGC's Findings and Decision "contrary
to law, arbitrary, capricious, and an abuse of discretion."
[Dkt. No. 1]. On September 16, 2013, the PBGC filed its Answer
as well as a Counterclaim to enforce its Final Determination.
[Dkt. No. 11].
II. STANDARD OF REVIEW
Summary judgment is the "appropriate mechanism" for
disposing of actions for judicial review of final determinations
by the PBGC. Davis v. Pension Ben. Guar. Corp., 864 F. Supp. 2d
148, 156 (D.D.C. 2012) aff'd in part, 734 F.3d 1161 (D.C. Cir.
2 013) (quoting United Steel, Paper & Forestry, Rubber, Mfg. ,
Energy, Allied Indus. & Serv. Workers Int' 1 Union, AFL-CIO-CLC
v. Pension Ben. Guar. Corp., 839 F. Supp. 2d 232, 246 (D.D.C.
2012)). Summary judgment may be granted only if the moving party
has shown that there is no genuine dispute of material fact and
that the moving party is entitled to judgment as a matter of
law. See Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrettr 477
U.S. 317, 325 (1986); Waterhouse v. Dist. of Columbiar 298 F.3d
989, 991 (D.C. Cir. 2002).
When, as in the case at bar, the Court must decide a matter
on the basis of an administrative record, the record compiled by
the agency provides the complete set of facts before the Court.
Deppenbrook v. Pension Ben. Guar. Corp., 950 F. Supp. 2d 68, 74
15
(D.D.C. 2013). The Court's task is to determine whether the
agency's action was "arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law." 5 U.S.C. §
7 0 6 ( 2) (A) . An agency's decision will stand unless it "has relied
on factors which Congress has not intended it to consider,
entirely failed to consider an important aspect of the problem,
offered an explanation for its decision that runs counter to the
evidence before the agency, or is so implausible that it could
not be ascribed to a difference in view or the product of agency
expertise." Nat'l Ass'n of Home Builders v. Defenders of
Wildlife, 551 U.S. 644, 658 (2007) (quoting Motor Vehicle Mfrs.
Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29, 43 (1983)).
With respect to questions of statutory interpretation,
courts must first consider "whether Congress has directly spoken
to the precise question at issue." Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). If
"the intent of Congress is clear" from the statute's language,
"that is the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed intent
of Congress." Id.
However, where a statute is ambiguous, courts apply
Chevron's second step by deferring to an "agency's construction
of [a] statute which it administers." Id.; Nat'l Cable &
16
Telecommunications Ass 1 n v. Brand X Internet Servs., 545 U.S.
967, 98 9 ( 2 005) (" [W] here a statute 1 s plain terms admit of two
or more reasonable ordinary usages, the [agency's] choice of one
of them is entitled to deference."). Deference is due "not only
because Congress has delegated law-making authority to the
agency, but also because that agency has the expertise to
produce a reasoned decision." Vill. of Barrington, Ill. v.
Surface Transp. Bd., 636 F.3d 650, 660 (D.C. Cir. 2011).
Finally, an agency's interpretation of its own regulations
is controlling unless plainly erroneous or inconsistent with the
regulation. See Auer v. Robbins, 519 U.S. 452, 461 (1997);
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994).
III. ANALYSIS
29 U.S.C. § 1341 provides the "[e]xclusive means" for
terminating single-employer pension plans and requires plan
administrators to distribute assets "in accordance with the
provisions of the plan and any applicable regulations." 29
U.S.C. § 1341 (a) (1) & (b) (3) (A). Resolution of this matter rests
primarily on the PBGC's regulation codified at 29 C.F.R.
§ 4041.8, which provides that a "participant's or beneficiary's
plan benefits are determined under the plan's provisions in
effect on the plan's termination date." 29 C.F.R. § 4041.8(a).
Royal Oak argues that, despite being adopted more than a
month after the Plan's termination, the PPA Amendment accords
17
with § 4041.8. First, Royal Oak contends that because it
intended the Amendment to operate retroactively, the PPA
Amendment was "in effect" on October 31, 2008. Second, Royal Oak
insists that even if the PPA Amendment was not in effect on the
termination date, it is permissible under § 4041. 8' s exceptions
for amendments that do not decrease benefits or are necessary to
meet certain tax code requirements. Royal Oak's arguments are
without merit.
A. The PPA Amendment Was Not "in Effect" on the Plan's
Ter.mination Date.
1. The PBGC's interpretation of "in effect" is
entitled to deference.
Under 29 C.F.R. § 4041.8(a), "benefits are determined under
the plan's provisions in effect on the plan's termination date."
It is undisputed that Royal Oak did not amend the Plan until
December 5, 2008, over a month after the Plan's termination on
October 31, 2008. Royal Oak, argues, however, that because it
intended for the PPA Amendment to operate retroactively, the
Amendment was "in effect" on October 31, 2008.
In its Final Determination, the PBGC stated that the PPA
Amendment was not "in effect" on the termination date, because
"[a] s of the date of Plan termination, [Royal Oak] had not yet
adopted the PPA Amendment[.]" AR-0875. Thus, for the purposes of
§ 4041.8, the PBGC interprets "in effect" to require formal
adoption.
18
Royal Oak complains about the PBGC's failure to explicitly
define "in effect" in the text of § 4041.8. However, the PBGC's
straightforward interpretation is a natural and reasonable
reading of the regulation which reads as follows:
A participant's or beneficiary's plan benefits are
determined under the plan's provisions in effect on the
plan's termination date. Notwithstanding the preceding
sentence, an amendment that is adopted after the plan's
termination date is taken into account [if certain
exceptions apply.]" 29 C.F.R. § 4041.8(a).
Read together, the clear implication of these two sentences is
that "an amendment that is adopted after the plan's termination
date" is not "in effect on the plan's termination date [unless
certain exceptions apply.]" Id.
Royal Oak cites Davis v. Pension Ben. Guar. Corp., 734 F.3d
1161, 1166, 1168 (D.C. Cir. 2013) cert. denied, 134 S. Ct. 2878
(2014) to support its argument that an amendment may be "in
effect" before it has been adopted. However, the regulatory and
statutory provisions discussed in Davis dealt with the priority
of payments when a plan did not have sufficient assets to
satisfy its pension liabilities, and therefore are not relevant
in this case. Davis, 734 F.3d at 1168 (construing the meaning of
"in effect" as used in 29 U.S.C. § 1344(a) (3) (A) and 29 C.F.R. §
4044.13) . 9
9
Moreover, the definition of "in effect" at issue in Davis
actually accords with the PBGC's reading in this case. In Davis,
our Court of Appeals ultimately upheld the PBGC's view that an
19
Because the PBGC'$ interpretation of "in effect" is neither
plainly erroneous nor contrary to the Regulation, it is entitled
to deference. Auer, 519 U.S. at 461.
2. Section 1107 of the Pension Protection Act of
2006 does not provide relief from
29 C.F.R. § 4041.8.
Separate and apart from Title IV's plan termination
provisions, ERISA's Title I includes "anti-cutback" provisions,
which prohibit plan amendments that reduce accrued benefits even
if the reductions occur before plan termination. See ERISA
204(g), 29 U.S.C. § 1054(g); I.R.C. § 411(d) (6) (parallel
provision in I.R.C.). Recognizing that the Pension Protection
Act of 2006 ("PPA") would require plan amendments that might
reduce accrued benefits, Congress provided relief from the anti-
cutback provisions. See PPA § 1107 ("such pension plan shall not
fail to meet the requirements of section 411(d) (6) of the
[I.R.C.] and section 204(g) of [ERISA] by reason of such
amendment.") .
Royal Oak contends that because it observed the
requirements of § 1107, that section operated to make the PPA
Amendment retroactively effective as of January 1, 2008. Thus,
according to Royal Oak, the PPA Amendment was "in effect" on the
amendment is not "in effect" until the "later of the date on
which [it] is adopted or the date it becomes effective." Davis,
734 F.3d at 1168.
20
termination date for purposes of Title IV and its implementing
regulation 29 C.F.R. § 4041.8.
Contrary to Royal Oak's position, however, PPA § 1107 does
not give amendments retroactive effect. Instead, retroactivity
is a "condition" that amendments must fulfill in order to
qualify for the relief section 1107 provides. PPA § 1107 (b) (2)
("CONDITIONS- this section shall not apply to any amendment
unless such plan or contract amendment applies
retroactively for such period.").
Moreover, retroactive amendments are unquestionably bound
by § 4041.8's prohibition on post-termination benefit-decreasing
amendments. After a plan is terminated,§ 4041.8 operates to
limit the set of permissible retroactive amendments to those
that do not decrease benefits or are necessary for tax code
compliance. Nothing in PPA § 1107 affects this crucial portion
of Title IV's implementing regulations.
It is perfectly clear that while "PPA § 1107 amended the
I.R.C., [it] says nothing about Title IV' s prohibition against
benefit reducing, post-termination amendments." Pension Ben.
Guar. Corp. v. Kentucky Bancshares, Inc., 7 F. Supp. 3d 689, 700
(E.D. Ky. 2014) aff'd, No. 14-5573, 2015 WL 221621 (6th Cir.
Jan. 15, 2015). "[C]ompliance with PPA § 1107 [does] not obviate
[the] obligation to also comply with ERISA' s standard
termination requirements. The two sets of requirements are not
21
contradictory[.]" Kentucky Bancshares, 2015 WL 221621, at *4
(emphasis in original). For these reasons, this Court agrees
with the Chief Judge of the United States District Court.for the
Eastern District of Kentucky that the "PBGC was not arbitrary or
capricious in determining that PPA § 1107 did not authorize the
post-termination reduction in benefits." Kentucky Bancshares,
7 F. Supp. 3d at 700.
Royal Oak claims the PBGC' s reading of PPA § 1107 somehow
conflicts with the IRS's Determination Letter. However, the IRS
determined only that Royal Oak's amendments to and termination
of the Plan " [did] not adversely affect its qualification for
federal tax purposes." AR-0745. The IRS Letter distinctly states
that it "is not a determination regarding the effect of other
federal or local statues." Id. In sum, the Letter does not
suggest in any way that § 1107 provides relief from 29 C. F. R.
§ 4041.8 or any other part of Title IV's statutory and
regulatory provisions.
Finally, Royal Oak raises several practical concerns that
it believes cut against the PBGC's interpretation of PPA § 1107.
The Company argues that unless § 1107 is read to permit benefit-
decreasing post-termination amendments, some plans may be left
with insufficient funds to meet their liabilities. However,
minimum plan funding rules already rely on the actual terms of
the plan in effect and generally require plans to have
22
sufficient assets to pay benefit liabilities. See 2 6 C. F. R. §§
1.430(d)-1(f)(4)(iii)(B) and (D).
Royal Oak also worries that unless § 1107 is read to negate
§ 4041.8's prohibition on post-termination benefit cuts, plan
administrators could be forced to violate their fiduciary duties
by treating similarly situated participants differently. The
Company offers this example:
[I] f a Royal Oak employee terminated employment in June
2008 and was eligible for a lump-sum distribution, his
benefit would be calculated using the PPA Assumptions
because plans were required to be in good faith compliance
with the PPA beginning in January 1, 2008. See PPA §
1107 (a) (1), (b) (2). But a participant eligible for the same
lump-sum benefit distribution when the Plan terminated on
October 31, 2008 would receive a benefit calculated using
pre-PPA assumptions. Royal Oak Opp'n at 13.
Royal Oak's concern is unfounded. In its hypothetical, the
Company could have: 1) simply adopted the PPA amendment prior to
the plan termination date (all plan participants would then have
been paid under the PPA Assumptions) ; or 2) made additional
payments after termination to ensure that all participants
received lump sums of the value required by the Plan's terms on
the termination date. By waiting until after the termination
date, Royal Oak was bound to comply with 29 C.F.R. § 4041.8's
prohibition on post-termination benefit decreases.
Interestingly, Royal Oak never explains why it delayed its
adoption of the PPA Amendment.
23
For all these reasons, the PBGC' s determination that the
PPA Amendment was not in effect on the Plan's termination date
was not arbitrary, capricious, or otherwise contrary to the law.
B. The PPA Amendment Is Not a Permissible Post-
Termination Amendment under Title IV of ERISA and 29
C.F.R. § 4041.8.
Royal Oak argues that the PPA Amendment escapes § 4041.8's
prohibition on post-termination benefit-decreasing amendments
because ( 1) the amendment did not decrease the value of
participants' benefits and (2) even if it did, the decrease was
necessary to comply with tax code provisions. Neither argument
is convincing.
1. The PPA Amendment "decrease[s] the value of the
participant[s'] or beneficiar[ies'] plan benefits
under the plan's provisions in effect on the
termination date." 29 C.F.R. § 4041.8(a) (1).
It is undisputed that adoption of the PPA Amendment
resulted in Plan pa~ticipants receiving roughly $2.1 million
less in distributions than they would have received in its
absence. Royal Oak contends, however, that Plan participants
experienced no decrease at all in the value of their benefits.
The PBGC concluded that because Plan participants received
smaller lump-sum payments under the PPA Amendment than they
would have under the Plan as written on the termination date,
the Amendment "decreased the value of the participant [ s']
plan benefits" within.the meaning of 29 C.F.R. § 4041.8. AR-0875
24
("There is no doubt that the value of the lump sums calculated
by [Royal Oak] using the PPA interest rate and mortality table
is less than the value of the lump sums calculated using the
formula provided under the Plan (i.e., 30-year Treasury rate and
94 GAR Mortality Table)."). Thus, the PBGC reads the word
"value" to mean the dollar amount of payments actually received
by Plan participants. Id. The PBGC's interpretation of
§ 4041.8(a)(1) is neither plainly erroneous nor inconsistent
with the Regulation, and is, consequently, entitled to
deference. Auer v. Robbins, 519 U.S. 452, 461 (1997).
Royal Oak attempts to draw the focus away from § 4041. 8' s
language by contending that when Congress enacted the present
value assumptions codified at I.R.C. § 417(e), it expressed its
"legislative judgment" that lump sums calculated according to
§ 417(e) are necessarily equivalent to the value of accrued plan
benefits. The company argues "[i] n Code section 417 (e) Congress
has prescribed how actuarial equivalence must be calculated for
lump-sum distributions." Royal Oak Mot. at 16 (emphasis added).
"Thus," Royal Oak contends, "rather than decreasing plan
benefits, the PPA Amendment's substitution of the PPA
[Assumptions codified at§ 417(e)] for the GATT Structure merely
updates the Plan's statutorily required methodology for
calculating the present value of a participant's benefit under
the Plan." Royal Oak Mot. at 16.
25
Royal Oak's characterization of the assumptions codified in
§ 417(e) is simply wrong. I.R.C. § 417(e) provides only the
minimum value of lump-sum payments. Despite Royal Oak's repeated
claims to the contrary, there is no evidence that Congress made
a "legislative judgment" that the value of benefits calculated
using the 417(e) assumptions is equivalent to the value
calculated using other methods. Just the opposite is true
417 (e) ( 3) (A) contemplates that plans will choose among different
methods to calculate larger or smaller present values of plan
benefits. That is why§ 417(e) establishes a statutory minimum.
I.R.C. § 417(e) (3) (A) ("[T]he present value shall not be less
than the present value calculated by using the applicable
mortality table and the applicable interest rate." (emphasis
added)) .
Royal Oak further argues that "[t]he appropriate inquiry is
not whether the PPA Amendment reduced the amount of benefits,
but whether it reduced the value of benefits:" Royal Oak Reply
at 11 (emphasis in original) . This attempt to draw a distinction
between the "amount" of benefits (which, according to Royal Oak,
may decrease) and the "value" of benefits (which, under §
4041.8, may not decrease), Id., is unconvincing. Royal Oak's
interpretation has n0 basis in the text of the Regulation
itself. Subsection (a) of § 4041.8 discusses only "benefits" and
the "value of" benefits. The word "amount" appears only in a
26
subsection unrelated to the issues in this case. 29 C.F.R.
§ 4041.8 (b) (concerning plan's "residual assets" following
termination) .
Moreover, Royal Oak's interpretation of the words "decrease
. the value of plan benefits" is unconvincing on its face.
29 C.F.R. § 4041.8. Despite the fact that Plan participants
received approximately $2.1 million less in today's dollars than
they would have under the terms of the Plan on its termination
date, Royal Oak contends that Plan participants received the
same "value." Confronted with a nearly identical factual
situation (an employer's post-termination adoption of the
§ 417 (e) assumptions in reaction to the Pension Protection Act
of 2006), the Court of Appeals for the Sixth Circuit recently
noted that "the post-termination amendment undeniably resulted
in a decrease in the value of benefits to which participants and
beneficiaries were otherwise entitled under the provisions in
effect on the termination date." Kentucky Bancshares, Inc., 2015
WL 221621, at *2.
Finally, Royal Oak argues that because § 1107 of the
Pension Protection Act of 2006 provided relief from Title I of
ERISA's anti-cutback provisions, the PPA Amendment did not
decrease the value of Plan benefits. However, as already
discussed above, § 1107's grant of relief from specific
provisions of Title I has no effect on Royal Oak's obligation to
27
abide by § 4041.8, which implements Title IV. Moreover, the
anti-cutback relief provided under § 1107, see discussion at 20
supra, was necessary precisely because a change in actuarial
assumptions was likely to lead to smaller lump-sum payments.
Contrary to Royal Oak's view, § 1107's anti-cutback relief
implies that Congress viewed new actuarial assumptions as
potentially benefit-decreasing.
As the PBGC explained, " [on] its date of termination, the
Plan did not simply promise payment of actuarially equivalent
benefits, but actuarially equivalent benefits valued using the
greater of the Plan's assumptions or GATT assumptions." PBGC
Reply at 7 n.12. By amending its Plan to pay participants less
after the termination date, Royal Oak decreased the value of
Plan benefits and violated§ 4041.8.
2. The "decrease" in the value of plan benefits
caused by the PPA Amendment was not necessary "to
meet a qualification requirement under section
401 of the [Internal Revenue] Code[.]" 29 C.F.R.
§ 4041.8(c) (1).
The parties agree that Royal Oak had an obligation to
ensure that Plan participants received lump-sum payments no less
than those calculated using the assumptions of the PPA
Structure, codified at I.R.C. § 417(e). Royal Oak contends that
the PPA Amendment was the only amendment that would ensure
consistent, constant compliance with the PPA's changes to
§ 417 (e), and therefore was the only amendment that Royal Oak
28
could have adopted to ensure tax qualification. Royal Oak's
position is not correct.
The PBGC concedes that Royal Oak could have complied with
§ 417(e)'s minimum-lump-sum obligations by enacting the PPA
Amendment prior to the termination date. If Royal Oak had simply
amended the Plan before October 31, 2008 (a date Royal Oak
itself chose), no barrier would have been posed by 29 C.F.R. §
4041.8, which limits only post-termination amendments.
However, by waiting until after the Plan's termination
date, Royal Oak took on the burden of complying with both I.R.C.
§ 417(e) and 29 C.F.R. § 4041.8. After October 31, 2008, Royal
Oak could decrease the value of lump-sum payments only if
"necessary" to maintain tax compliance. 29 C.F.R.
§ 4041.8 (c) (1).
Despite its assertions to the contrary, Royal Oak could
have easily complied with the tax code without decreasing
benefits to its Plan participants.
The PBGS' s Final Determination expl.ains that:
[Royal Oak] could have amended the Plan to pay the greater
of the PPA interest rates and the 30-year Treasury rates
[i.e., the rates outlined in the Plan on its termination
date]. As a result, the . PPA Amendment eliminating the use
of 30-year Treasury rates and the GAR 94 mortality table
for valuing lump sums was not necessary for Plan
qualification, and the exception under 29 C.F.R. §
10
4041.8(c) (1) does not apply. AR-0875-0876.
10
IRS guidance also suggests that plan administrators may
comply with the I.R.C. and ERISA by calculating lump sums under
29
Royal Oak never states plainly why this "greater-of-the-
two" formula, endorsed by both the PBGC and IRS, would not have
met the requirements of I.R.C. § 417(e) without decreasing
benefits. The Company does argue that "[u] sing any assumptions
other than those dictated under Code § 417 (e) [that is, the PPA
interest rates] would run the risk that, given the fluctuating
nature of interest rates, those assumptions could at some point
produce a lower benefit amount than that produced by the
assumptions in Code § 417 (e) . " Royal Oak Opp' n at 17. However,
the PBGC's suggested alternative addresses precisely this
problem. If Royal Oak had amended its Plan to pay the greater of
the lump sums produced under§ 417(e) and under the Plan's terms
as of the terminations date, it would have complied with both 29
C.F.R. § 4041.8 and I.R.C. § 417(e).
Moreover, the PBGC has not ordered that Royal Oak adopt the
"greater-of-the-two" formula. The Agency merely demonstrates
that the benefit decrease was unnecessary because Royal Oak
"could have amended the Plan to pay the greater of the PPA
interest rates and the 30-year Treasury rates." AR-087 5
(emphasis added).
two methods and making payments pursuant to whichever method is
more favorable to plan participants. 26 C.F.R. § 1.417(e)-
1 (d) (5); 2008-12 I.R.B. 638-42, IRS Notice 2008-30.
30
Accordingly, the PPA Amendment adopted by Royal Oak was not
a valid post-termination amendment, and therefore it must make
additional payments to ensure that Plan participants receive the
benefits to which they were- entitled "under the plan's
provisions in effect on the plan's termination date." 29 C.F.R.
§ 4041.8 (a).
IV. CONCLUSION
For the foregoing reasons, Royal Oak's Motion for Summary
Judgment is denied, and PBGC' s Motion for Summary Judgment is
granted.
An Order shall accompany this Memorandum Opinion.
January$. 2015
Judge
Copies to: attorneys on record via ECF
31