UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

USCA CASE NO. 99-10640

JERRY L. LYONS, individually and on behalf
Of all other persons similarly situated,

Plaintiff/Appellant,

v.

GEORGIA-PACIFIC CORPORATION
SALARIED EMPLOYEES RETIREMENT
PLAN AND GEORGIA-PACIFIC CORPORATION,

Defendant/Appellees.

Appeal from the United States District Court for the
Northern District of Georgia, Atlanta Division

___________________________________________________

BRIEF FOR THE ASSOCIATION OF PRIVATE PENSION
AND WELFARE PLANS ("APPWP") AS AMICUS CURIAE
IN SUPPORT OF THE APPELLEES FOR AFFIRMANCE
OF THE JUDGMENT BELOW

____________________________________________________

Howard J. Bashman
Georgia Bar No.
Robert G. Chambers

Jeanne L. Bakker

MONTGOMERY, MCCRACKEN, WALKER & RHOADS, L.L.P.
123 South Broad Street
Philadelphia, Pennsylvania 19103
(215) 772-7620

Court of Appeals Docket No. 99-10640
Lyons v. Georgia-Pacific Corporation Salaried Employees Retirement Plan

CERTIFICATE OF INTERESTED PERSONS AND
CORPORATE DISCLOSURE STATEMENT

 

Pursuant to Fed. R. App. P. 26.1 and 11th Cir. R. 26.1-1, 26.1-2, 26.1-3 and 28-1(b), Amici curiae Association of Private Pension and Welfare Plans ("APPWP") submits this Certificate of Interested Persons and Corporate Disclosure Statement.

The following is a full and complete alphabetical list of all trial judges, attorneys, persons, associations of persons, firms, partnerships, or corporations that have an interest in the outcome of this litigation, including subsidiaries, conglomerates, affiliates and parent corporations, and other identifiable legal entities related to a party:

TABLE OF CONTENTS

TABLE OF CITATIONS

STATEMENT OF INTEREST OF AMICI CURIAE

The Association of Private Pension and Welfare Plans ("APPWP") is a broad based, non-profit trade association founded to protect and foster the growth of this nation’s privately sponsored employee benefit plans. The members of APPWP include both small and large employer sponsors of employee benefit plans, as well as plan support organizations, such as consulting and actuarial firms, investment firms, banks, insurers and other professional benefit organizations. Collectively, its more than 230 members sponsor and administer plans covering more than 100 million plan participants.

As a representative of the private employer plan community, APPWP has a strong interest in the federal questions presented by this case under the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code ("Code"). Many of APPWP’s member employers sponsor cash balance plans and many member plan support organizations provide support services to employers that sponsor cash balance plans.

The District Court’s holding in this case has extraordinary significance for sponsors of cash balance plans. The District Court’s holding bears directly on employers’ ability to define the content of "accrued benefits" under cash balance plans and distribute promised benefits from cash balance plans.

SUMMARY OF THE ARGUMENT

A. Plaintiff/Appellate Jerry Lyons ("Lyons") is not entitled to the additional amount he seeks because Lyons has already received the entire "accrued benefit" provided under the Georgia-Pacific Salaried Employees Retirement Plan ("SERP"). The essential benefit promise of the SERP is service credits through a participant’s termination of employment and interest credits through a participant’s distribution date. The balance in the hypothetical account is a participant’s "accrued benefit. " Lyons received the balance in his hypothetical account as of the date of distribution.

Defendant/Appellee Georgia-Pacific Corporation ("Georgia-Pacific") is not required to undertake the projection forward/discount back exercise with respect to post-distribution interest credits because such credits through normal retirement age are not part of the essential benefit promise of a cash balance plan. That the SERP expresses that the "accrued benefit" may be paid in the form of an annuitized benefit at normal retirement age does not require projecting the hypothetical account forward to normal retirement age. The form in which the "accrued benefit" is payable at normal retirement age does not drive the amount of the "accrued" normal retirement benefit.

In addition, Georgia-Pacific is not required to undertake the projection forward/discount back exercise in order to satisfy the rule in Treas. Reg. § 1. 417(e)-1(d)(1) that the amount of an optional lump sum distribution cannot be less than the present value of the normal retirement benefit. That the form in which the present value comparison is made under Treas. Reg. § 1. 417(e)-1(d)(1) is the normal retirement benefit form does not require projecting the hypothetical account forward to normal retirement age in order to determine the amount of the "accrued benefit" at normal retirement age. The forms used in the present value comparison do not drive the amount of the "accrued" normal retirement benefit.

Finally, the SERP necessarily satisfies the present value rule in Treas. Reg. § 1. 417(e)-1(d)(1) without an operational need to undertake the projection forward/discount back exercise allegedly required under Treas. Reg. § 1. 417(e)-1(d)(2) because the SERP’s design ensures that the amount of the optional lump sum distribution will always exceed the present value of the normal retirement benefit. This is so because the hypothetical account grows at an interest rate that exceeds the rate used to discount the normal retirement benefit back to present value. Consequently, it is entirely unnecessary for the SERP to undertake any methodology, much less the projection forward/discount back methodology allegedly required under Treas. Reg. § 1. 417(e)-1(d)(2), in order to comply with Treas. Reg. § 1. 417(e)-1(d)(1).

B. The present value methodology described in ERISA § 203(e), 29 U. S. C. § 1053 (hereinafter "ERISA § 203(e)"), and Code § 411(a)(11), 26 U. S. C. § 411(a)(11) (hereinafter "Code §411(a)(11)") expressly applies only to determinations governing involuntary lump sum distributions. On their face, those provisions do not apply to voluntary distributions. Thus, the District Court correctly found that the application of Treas. Reg. § 1. 417(e)-1(d) to ERISA § 203(e) through Treas. Reg. § 1. 411(a)-11 for purposes of determining the present value of all distributions from a pension plan is inconsistent with Congressional intent and therefore unreasonable.

C. Because Georgia-Pacific had complete discretion in the administration of the SERP, Georgia-Pacific’s reliance on the favorable Internal Revenue Service ("IRS") determination letter for assurance that the calculation of Lyons’ lump sum distribution complied with ERISA § 203(e) and Code § 411(a)(11) was entirely reasonable, and therefore should not be reversed under Firestone Tire and Robber Co. v. Bruch, 489 U. S. 101 (1989).

D. Lyons’ theory that his "accrued benefit" under the SERP includes post-distribution interest credits through normal retirement age repudiates two fundamental public policies. First, operating the SERP in the manner advocated by Lyons causes the SERP to treat older workers less favorably than younger workers. Second, operating the SERP in the manner advocated by Lyons causes the SERP to reward an employee’s repeated termination of service rather than his continued service to his employer.

STATEMENT OF ISSUES

1. Whether the amount of a participant’s "accrued benefit" under a cash balance plan includes post-distribution interest credits through normal retirement age where the participant terminates employment and elects to receive an optional lump sum distribution prior to normal retirement age?

a. Whether Georgia-Pacific was required to undertake the projection forward/discount back exercise to determine the amount of an "accrued benefit" because the form in which the "accrued benefit" is payable is a normal retirement benefit?

b. Whether Treas. Reg. § 1. 417(e)-1(d)(1) requires the projection forward/discount back exercise because the present value comparison in to the present value of the normal retirement benefit?

c. Whether the SERP complies with Treas. Reg. § 1. 417(e)-1(d)(1) without undertaking the projection forward/discount back exercise allegedly required by Treas. Reg. § 1. 417(e)-1(d)(2) because the SERP’s plan design ensures that the amount of an optional lump sum distribution will always exceed the present value of the normal retirement benefit?

2. Whether the present valuation methodology described in Treas. Reg. § 1. 417(e)-1(d) is limited to determinations governing involuntary lump sum distributions only?

3. Whether Georgia-Pacific’s reliance upon the favorable IRS determination letter for assurance that the calculation of Lyons’ lump sum distribution complied with ERISA § 203(e) and Code § 411(a)(11) was reasonable, and therefore should not be reversed under Firestone Tire and Rubber Co. v. Bruch, 489 U. S. 101 (1989)?

4. Whether the projection forward/discount back exercise violates fundamental public policy regarding the treatment of older workers and the underlying purpose of retirement plans?

ARGUMENT

I. Lyons’ Claim Lacks Merit Because Lyons Seeks Distribution Of An Amount That Exceeds The "Accrued Benefit" Promised Him Under The SERP.

A. Introduction.

This case challenges a fundamental precept of this nation’s private retirement system: that private employers, not the government, define the amount of benefits provided under private pension plans. The United States Congress endorsed this guiding principle in 1974 when it adopted ERISA. Rather than prescribing a mandated level of pension benefits that employers must provide, Congress simply sought to ensure that workers receive whatever pension benefits they have been "promised. " Nachman Corp. v. Pension Benefit Guaranty Corp. , 446 U. S. 359, 361 (1980). Thus, under ERISA, private employers are free to define the content of pension benefits provided under private pension plans. Alessi v. Raybestos-Manhattan, Inc. , 451 U. S. 504 (1981). ERISA specifically provides that a participant’s "accrued benefit" shall be "determined under the plan …" ERISA § 3(23) 29 U. S. C. § 1102(23) (hereinafter "ERISA § 3(23)") (emphasis added).

Lyons contends that the distribution he received from Georgia-Pacific did not represent his entire "accrued benefit" under the SERP because Georgia-Pacific did not project the balance in his hypothetical account forward through normal retirement age using the interest credit rate specified in the plan and then discount that increased amount back to present value. In fact, by arguing that this projection forward/discount back exercise is required, Lyons is simply trying to take advantage, through actuarial contrivance, of an employer who, like many other employers in this country, sought to provide its employees with generous pension benefits. Under the SERP, Georgia-Pacific credits participants’ hypothetical accounts with interest at a rate that will always exceed the conservative government discount rate. Thus, through scheme and invention, Lyons is attempting to force the application of the present value methodology described in Treasury Reg. § 1. 417(e)-1(d), so that the SERP’s generous interest credits through normal retirement age would be included in his distribution.

For Lyons and for every other employee or every other employer that generously defines interest credits under cash balance plans, the result of this projection forward/discount back maneuver in an unintended and unexpected windfall that exceeds the "accrued benefit" their employers promised them under such plans. For Georgia-Pacific and every other employer that promised generous interest credits under their cash balance plans, acceptance of Lyons’ projection forward/discount back scheme means that employers in this country no longer have the ability to define the level of benefits provided under their pension plans. As a result, employers’ benefits liabilities will be automatically increased by millions of dollars. Such use of ERISA and the Code as a trap for unwary generous employers cannot have been intended by anyone and should not be allowed by this court.

B. The Essential Nature Of The Cash Balance Plan "Accrued Benefit" Promise.

In 1974, ERISA divided the universe of employee pension plans into two broad categories: defined contribution plans and defined benefit plans. Under a "defined contribution plan," employers define "accrued benefits" by reference to the balance in an individual plan that grows with employer and employee contributions and investment earnings. ERISA § 3(34), 29 U. S. C. § 1002(34).

Under ERISA § 3(35), 29 U. S. C. § 1002(35), any employee pension plan that is not a defined contribution plan is deemed a "defined benefit plan. " Under traditional defined benefit plans, the predominate type of defined benefit plan utilized by employers in 1974, employers invariably define "accrued benefit" by reference to a formula that yields a stream of monthly payments upon a participant’s attainment of normal retirement age. For example, an employer might define a participant’s "accrued benefit" as one percent (1%) of a participant’s final average compensation, multiplied by his years of service. When a participant retires at normal retirement age, his "accrued benefit" is the dollar amount produced by this calculation.

Because "accrued benefit" under traditional defined benefit plans are defined by reference to final average compensation and total years of service, a participant’s "accrued benefit" grows most dramatically during the participant’s final years of employment. For employees who spend an entire career with a single employer and retire at age 65, a traditional defined benefit plan provides a meaningful retirement benefit. However, the results are disappointing for employees who switch jobs several times during their careers – as most Americans do. In addition, because "accrued benefit" under a traditional defined benefit plan is defined by reference to a formula with variables that cannot be determined until an employee terminates employment (e. g. , final average compensation), the "accrued benefit" is invisible to most participants.

As the workforce generally became more mobile in the late 1970s and early 1980s, many employers came to view the delayed accrual and invisibility features of a traditional defined benefit plan "accrued benefit" as disadvantageous. Mobile workers demand pension benefits that accrue rapidly and are visible. In response to the reality of a mobile workforce, benefits professionals designed a new type of defined benefit plan in the mid 1980s that eliminates some or all of these disadvantageous features -- the cash balance plan.

Rather than defining "accrued benefit" by reference to a formula that yields an annuitized benefit beginning at normal retirement age, cash balance plans utilize a simple, easy-to- understand design tool for defining participants’ "accrued benefit" – the hypothetical account balance. At any given time, a participant’s "accrued benefit" is the balance of his hypothetical account. Thus, an employer’s essential and very simple "accrued benefit" promise is the accumulated balance in the participant’s hypothetical account.

The hypothetical account grows by virtue of employer contributions that are credited to the account in the amount defined under the plan. First, the "service credit" represents an employee’s accrual for his service. Second, the "interest credit" mimics investment earnings on the employee’s service accrual at a rate specified in the plan. Thus, the "accrued benefit" grows steadily over time.

Cash balance plans thus operate to benefit a mobile and a stationary workforce. In a cash balance plan environment, an individual who switches jobs two or three times in his career can accrue the same meaningful retirement benefit as an employee who remains with a single employer for an entire career. In addition, because of its simplicity, the "accrued benefit" is tangible, understandable and, most importantly, visible to employees. On any given day in the career life of a cash balance plan participant, the participant can determine the amount of his "accrued benefit" by ascertaining the balance in his hypothetical plan account.

Contrary to Lyons’ repeated assertions, Georgia-Pacific simply did not promise that the SERP "accrued benefit" includes interest credits through normal retirement age where a participant terminates employment and elects a lump sum distribution prior to normal retirement age. Rather, Georgia-Pacific promised in SERP Section 3. 5(b) that interest credits would be added to Lyons’ account "Until the Benefit Commencement Date. "

In the case of a lump sum payment, the "Benefit Commencement Date" is "the first date on which all events have occurred which entitle the Participant to payment under the Plan" (i. e. , when the participant files a written claim for benefits in which he identifies his desired form of payment and date of distribution. ) Finally, the SERP provides that the optional lump sum payment is "equal to the amount credited to the Participant’s Personal Account as of the end of the month preceding his Benefit Commencement Date. " Plainly, Georgia-Pacific did not promise participants who terminate their employment and elect a distribution before their normal retirement age that the SERP’s "accrued benefit" would include post-distribution interest credits through normal retirement age to their distribution.

With disingenuous and nonsensical arguments, Lyons twists beyond recognition the definition of "accrued benefit" in ERISA § 3(23) in an effort to avoid the SERP’s crystal clear description of Georgia-Pacific’s "accrued benefit" promise. Under ERISA, "accrued benefit" means:

ERISA § 3(23) (emphasis added). Consistent with this definition, SERP Section 1. 1 provides:

Thus, the amount of the promised "accrued benefit" that is "determined under the [SERP]" is the amount in the participant’s hypothetical account. The form in which the SERP "accrued benefit" is payable is expressed as an "increasing annuity, commencing on a Participant’s Normal Retirement Date. "

To make his argument, Lyons purposely obfuscates the distinction between the amount of an "accrued benefit" and the form in which an "accrued benefit" is payable. Lyons argues that the "accrued benefit" cannot be the balance of the hypothetical account because the "accrued benefit" is "payable in the form of an increasing life annuity commencing on a Participant’s Normal Retirement Date. " Thus, Lyons argues: "Because the accrued benefit under the Plan is an annuity payable at normal retirement age (here, age 65), computation of [his] normal retirement benefit necessarily requires accruing interest credits to age 65. " Lyons completely misapprehends accrual growth in pension plans. The form in which a pension benefit is payable and the fact that it commences at normal retirement age simply do not drive the amount of the "accrued benefit. " In fact, the amount of an "accrued benefit" under any pension plan is driven by the methodology utilized by the plan for defining accrual growth.

For example, the amount of the annuitized "accrued benefit" commencing at normal retirement age under a traditional defined benefit plan is driven by the formula used to calculate the "accrued benefit" (e. g. , final average pay multiplied by years of service). Under such a plan, the amount of the "accrued benefit" increases each time a participant receives an increase in pay or completes another year of service. Likewise, the amount of the "accrued benefit" under a cash balance plan increases each time a service credit or interest credit is added to the balance of a hypothetical account. Neither "accrued benefit" grows because the "accrued benefit" may be paid as an annuity commencing at normal retirement age.

As explained above, the SERP’s methodology for determining "accrued benefit" growth clearly does not include post-distribution interest credits through normal retirement age where an employee terminates employment and elects a lump sum distribution prior to normal retirement age. Rather, the SERP determines the amount of an "accrued benefit" by the then-current balance a participant’s hypothetical account. Thus, in accordance with Section 1. 1 of the SERP, the amount of Lyons’ "accrued benefit" was the then-current balance in his Personal Account and Georgia-Pacific distributed that entire amount to him.

To bolster his claim that Georgia-Pacific failed to pay him an amount that represents his entire "accrued benefit" under the SERP, Lyons seeks to take advantage of the actuarial anomaly that occurs when the present valuation methodology in Treas. Reg. § 1. 417(e)-1(d) is applied to the SERP. Lyons wants to force the application of this methodology because Georgia-Pacific, like many other employers, generously provides for interest credits at a rate that actually exceeds the conservative government discount rate. However, the result of this forced application is an unjustified exaggeration of the "accrued benefit" promised under the SERP and a completely unexpected windfall benefit to Lyons. Nothing in ERISA, the Code or the Treasury Regulations requires this abrogation of the SERP’s essential benefit promise.

Lyons contends that the projection forward/discount back exercise is required under Treas. Reg. § 1. 417(e)-1(d)(2) to satisfy the present valuation rule in Treas. Reg. § 1. 417(e)-1(d)(1) which simply provides:

Lyons argues that, in order to ensure that the present value of his optional lump sum distribution is not less than the present value of his normal retirement benefit under the SERP, Georgia-Pacific should have determined the present value of his normal retirement benefit by: (1) projecting the balance of his hypothetical account forward using the SERP interest credit rate to determine the amount of his "accrued benefit" at normal retirement age; and (2) discounting that exaggerated normal retirement "accrued benefit" back to present value using the government discount rate. This projection forward/discount back exercise necessarily produces an amount that exceeds Lyons’ then-current balance in his account. Since the amount produced by this contrived calculation exceeded the then-current amount in his hypothetical account, Lyons contends that Georgia-Pacific should have distributed the higher amount to comply with and Treas. Reg. § 1. 417(e)-1(d)(1).

Lyons is wrong for two reasons: First, as demonstrated above, Lyons’ "accrued benefit" under a cash balance plan is the then-current balance in his hypothetical account, nothing more, nothing less. Projecting the then-current value of a hypothetical account forward using the SERP’s generous interest credit rate does not aid in the determination of the present value of the normal retirement form of benefit. The exercise only serves to increase the amount that must be discounted back to present value at the conservative government discount rate. Again, Lyons tries to justify the projection forward exercise because Treas. Reg. § 1. 417(e)-1(d)(1) requires a comparison of the present value of optional forms of benefit with the present value of the normal retirement form of benefit. However, just as the form in which the "accrued benefit" is payable does not drive the amount of the "accrued benefit" at normal retirement age, the forms in which the present value comparison is made does not drive the amount of the "accrued benefit" at normal retirement age. Rather, the amount of the "accrued" normal retirement benefit that ould be subject to any present valuation requirement is the monthly amount produced when the SERP’s annuity conversion factors are applied to the then-current amount in the hypothetical account.

Second, the projection forward/discount back exercise is unnecessary because the SERP’s accrual methodology and the fact that, under the SERP, lump sum distributions prior to normal retirement age are equal to the then-current amount in the hypothetical account ensures that the present value of an optional lump sum form of benefit prior to normal retirement age will always be greater than the present value of the normal retirement form of benefit. Thus, it is completely unnecessary to determine the present value of either forms of benefit in order to ensure that the optional form of benefit is not less than the present value of the normal retirement form of benefit as required by Treas. Reg. § 1. 417(e)-1(d)(1).

Under the SERP’s accrual methodology, the lump sum amount in the hypothetical account grows, in part, by virtue of interest credits at a rate that always exceeds the rate at which the normal retirement form of benefit is discounted back to present value. Because a cash balance plan defines the amount of the "accrued benefit" as a lump sum in the first instance, the present value of the SERP normal retirement form of benefit is computed as follows: (1) the lump sum amount in the hypothetical account is converted into an annuitized form of benefit commencing at normal retirement age using the SERP’s annuity factors; (2) the annuitized form of benefit is then converted into a lump sum using an applicable mortality table; (3) the lump sum is then discounted back to present value using the government discount rate.

As a result, the lump sum amount in the hypothetical account will always exceed the lump sum present value of the normal retirement form of benefit because the hypothetical account grows at a rate that exceeds the rate used to discount the normal retirement form of benefit back to present value. By providing that the amount of an optional lump sum distribution prior to normal retirement age shall be the amount in the hypothetical account, the SERP has ensured that the amount of this optional form of benefit will always be greater than the amount of the present value of the normal retirement form of benefit. As a result, it is completely unnecessary to utilize any methodology to calculate present values of forms of benefits for comparison purposes to ensure compliance with Treas. Reg. § 1. 417(e)-1(d)(1).

Esden v. Retirement Plan of the First National Bank of Boston, 182 F. R. D. 432 (D. Vt. 1998) presents almost identical issues to the instant matter. In Esden, the District Court agreed that Treas. Reg. 1. 417(e)-1(d) should not be applied to cash balance plans in a manner that abrogates a cash balance plan’s essential benefit promise. Like Lyons, the plaintiff in Esden (who also brought her claim through the National Center for Retirement Benefits) elected to receive a lump sum distribution of her cash balance plan benefit before her normal retirement age. Like Lyons, Esden contended that her employer’s cash balance plan violated Treas. Reg. § 1. 417(e)-1(d) because the plan did not project her hypothetical account forward through normal retirement age at the rate specified in the Plan for interest credit accruals. Instead, her employer projected her account forward at a lower rate specified in the plan as applicable only for purposes of satisfying Treas. Reg. § 1. 417(e)-1(d). Like Lyons, Esden contended that the plan should have paid her the present value of the projected benefit using the rate specified in the plan for interest credit accruals because that amount exceeded the amount in her hypothetical account.

The District Court refused to accept Esden’s claim to an exaggerated version of her "accrued benefit. " Recognizing the essential benefit promise of a cash balance plan, the District Court stated:

Edsen, 182 F. R. D. at 437. Thus, because the essential benefit promise of a cash balance plan is the balance in the hypothetical account, the District Court held that cash balance plans must be designed to ensure that the amount in the cash balance account that is distributed in a lump sum prior to normal retirement age always equals or exceeds the present value of the participant’s normal retirement benefit. Id.

Without questioning the applicability of Treas. Reg. § 1. 417(e)-1(d), the Esden court looked to the manner in which the plan sought to comply with that provision and still remain true to the plan’s essential benefit promise. The retirement plan in Esden accomplished this result by fixing the interest rate to project future interest credits in an amount that would always be less than the applicable PBGC discounting rate. This design ensured that:\

Esden, 182 F. R. D. at 437. Thus, the District Court ruled that the retirement plan fully complied with Treas. Reg. § 1. 417(e)-1(d).

As explained above, Georgia-Pacific also accomplished this result when it designed the SERP. Georgia-Pacific ensured that the optional lump sum distribution prior to normal retirement age will always exceed the present value of the normal retirement benefit because Georgia-Pacific fixed the amount of the interest credit so that the hypothetical account grows at a rate that exceeds the rate used to discount the normal retirement benefit back to present value. Thus, Georgia-Pacific’s design of the SERP ensures that the SERP does what it promises to do.

As a consequence, Georgia-Pacific’s design also eliminates the operational need for "actuarial acrobatics to ensure compliance with the applicable Treasury Regulations. " Esden, 182 F. R. D. at 437. If Lyons’ and Esden’s projection forward/discount back scheme were required by Treas. Reg. § 1. 417(e)-1(d) (which it is not), the SERP would be forced through this unsupported manipulation of the Treasury Regulation to do what Georgia-Pacific did not promise it would do: distribute exaggerated versions of the promised benefits that are simply unexpected windfalls to participants. In response to Esden’s plea for such an exaggerated benefit, the District Court remarked:

Esden, 182 F. R. D. at 437.

Like the District Court in Esden, the District Court below correctly refused to condone an interpretation of ERISA, the Code and the Treasury Regulations that contravenes the SERP’s essential benefit promise. The court, on appeal, should likewise refuse to adopt an interpretation of the legal requirements imposed on all cash balance plan sponsors that abrogates the right of employers in this country to determine the amount of pension benefits that will be provided their employees under privately sponsored pension plans.

The District Court correctly determined that application of Treasury Regulation § 1. 417(e)-1(d) to ERISA § 203(e) through Treasury Regulation § 1. 411(a)-11 for purposes of determining the present value of all distributions from a pension plan is inconsistent with Congressional intent and therefore unreasonable. The District Court recognized that the dollar limit and present valuation requirements in ERISA § 203(e) and Code § 411(a)(11) reflect Congress’ intent to limit employers’ and plans’ ability to involuntarily cash out small pension benefits, not impose restrictions on distribution of all benefits under pension plans.

When Congress enacted ERISA in 1974, Congress specifically permitted employers to involuntarily cash out small pension benefits when an employee terminated employment. This concession to employers and limit on participants’ rights under employee pension plans was to relieve employers and plans of the administrative burden of carrying relatively insubstantial amounts of benefits on their books for lengthy periods of time. However, at the same time, Congress placed a dollar limit on such involuntary cash outs to protect participants with more substantial vested accrued benefits who wished to receive their benefits at a later time (presumably nearer retirement). Thus, Congress required that participants consent to distributions over the dollar limit.

Congress first added the present valuation requirement in ERISA § 203(e) and Code § 411(a)(11) when Congress adopted the Retirement Equity Act of 1984 ("REA"). By doing so, Congress was simply refining and adjusting the restrictions on employers’ and plans’ ability to involuntarily cash out small pension benefits. REA’s new provisions increased the dollar limit for involuntary cash outs and required that employers utilize a specified present value methodology to calculate the present value of small pension benefits. Congress again refined the restrictions on employers’ and plans’ ability to involuntarily cash out small pension benefits when it adopted the Tax Reform Act of 1986 ("TRA 86"). In TRA 86, Congress simply modified the specified present value methodology employers must use to calculate the present value of small pension benefits. On their face, ERISA §203(e) and Code § 411 (a)(11) plainly only address the two requirements for involuntary distribution of small pension benefits – the dollar limit, and use the present value methodology. In addition, Congress retained the explicit restrictive language limiting the new present value methodology to the determination of whether consent is required. Thus, the District Court was correct when it ruled that "ERISA § 203(e) on its face applies only in the context of determining whether consent of a participant is required as a prerequisite to making an immediate distribution of benefits. "

Yet, contrary to the plain language of both provisions, Lyons and the IRS maintain that the present value methodology described in ERISA § 203(e) and Code § 411(a)(11) somehow provides a statutory basis for imposing the methodology described in Treas. Reg. § 1. 417(e)-1(d) for all distributions from employee pension plans. Lyons and the IRS both argue that Congress must have intended ERISA § 203(e) and Code § 411(a)(11) to apply to all distributions because Congress included the phrase "[i]n no event shall the present value determined under subclause (II) be less than $25,000" in both provisions.

However, this interpretation flies in the face of Congress’ original intent to restrict employers’ and plans’ ability to involuntarily cash out small pension benefits and renders both statutory provisions nonsensical. If the valuation requirements described in ERISA § 203(e)(2)(A)(i) and (ii) apply to all distributions, it is impossible to discern any rational meaning, plain or otherwise, in the heading of ERISA § 203(e) – "Consent for distribution; present value; covered distributions" – or the phrase "For purposes of paragraph (1) in ERISA § 203(e)(2)(A). Likewise, if the valuation requirements described in Code § 411(a)(11)(B) apply to all distributions, no rational meaning may be ascribed to the heading of Code § 411(a)(11) – "Restrictions on Certain Mandatory Distributions" – or the phrase "For purposes of subparagraph (A)" in Code § 411(a)(11)(b)(i). Surely Congress did not implicitly intend to render explicit statutory restrictive language absurd and irrational. See Consolidated Bank, N. A. v. United States Department of the Treasury, 118 F. 3d 1461 (11th Cir. 1997) (counts should avoid a statutory construction that has absurd results).

Lyons, of course, places great weight on a few isolated phrases in TRA 86’s legislative history to support his contention that Congress "reaffirmed its intent that all single sum distributions be computed in accordance with the interest rate restrictions" in Treas. Reg. § 1. 417(e)-1(d). However, a statute’s plain language prevails over contrary legislative history. See In re Sinclair, 870 F. 2d 1340, 1341 (7th Cir. 1989); United States ex rel. Farmers Home Admin. V. Erickson Partnership, 856 F. 2d 1068, 1070-71 (8th Cir. 1988).

In sum, the plain language of ERISA § 203(e) and Code § 411(a)(11) reveals that those provisions are strictly limited to involuntary cash outs of small pension benefits. As the District Court correctly found, the sole purpose of the present value methodology described in those provisions is to determine whether consent is required. Employers and plans are simply not required to utilize that present value methodology simply to determine the present value of all distributions from a pension plan. Thus, the application of Treas. Reg. § 1. 417(e)-1(d) to ERISA § 203(e) through Treas. Reg. 1. 411(a)-11 is unreasonable.

Lyons challenges Georgia-Pacific’s calculation of the amount of his lump sum distribution by alleging that the SERP failed to comply with ERISA § 203(e) and Code § 411(a)(11). As the Plan Administrator of the SERP, Georgia-Pacific was obligated to distribute benefits to plan participants in accordance with the plan document and applicable law. ERISA §§ 404(a)(1)(B), 502(a)(1)(B), 29 U. S. C. §§ 1104(a)(1)(D), 1132(a)(1)(B). In the exercise of that obligation, Georgia-Pacific had "complete discretionary control" Thus, under the Supreme Court’s ruling in Firestone Tire and Rubber Co. v. Bruch, 489 U. S. 101 (1989), Georgia-Pacific’s determination of the amount to be distributed to Lyons under the SERP may only be reversed if the court determines that Georgia-Pacific’s determination was "arbitrary and capricious. " The court must affirm Georgia-Pacific’s determination if it is "reasonable. " Dyce v. Salaried Employees Pension Plan of Allied Corp. , 15 F. 3d 163 (11th Cir. 1994).

When Georgia-Pacific amended the SERP to convert it to a cash balance design in 1988, Georgia-Pacific submitted the amendment to the IRS to obtain IRS assurance that the SERP fully complied with applicable law. The amended SERP unequivocally provided that lump sum distributions upon termination of employment would equal the balance in a participant’s hypothetical cash balance account. The IRS issued a favorable determination letter in May, 1989. When Georgia-Pacific distributed Lyons’ SERP benefit in 1993, Georgia-Pacific determined the amount of Lyons’ distribution in accordance with the explicit terms of the SERP that the IRS had approved in 1989. Finally, the IRS had not revoked its favorable determination of the SERP or otherwise indicated that the SERP violated applicable law.

In circumstances identical to those in the instant matter, the District Court in Esden recognized that an employer’s reliance on a favorable determination letter is entirely justified and reasonable. Edsen, 182 F. R. D. 432, 439. This court should reach the same conclusion. Indeed, any other conclusion would fail to recognize the real world utilization of favorable determination letters by thousands of employers in this country. Because a "favorable determination letter indicates that, in the opinion of the Service, the terms of the plan conformed to the requirements of Internal Revenue Code section 401(a)," favorable determination letters provide employers "advance assurance that the terms of their plans satisfy the qualification requirements. " Thus, employers who must maneuver the minefields created by the extensive and intensive statutory and regulatory authority applicable to qualified pension plans simply do not do anything in connection with their plans unless they have a favorable determination letter upon which to rely as a basis for their action.

Indeed, Georgia-Pacific had no choice but to rely upon the IRS’ favorable determination. Had Georgia-Pacific strayed from the terms of the SERP plan document in order to increase Lyons’ distribution in the manner Lyons seeks, Georgia-Pacific may have been subject to a claim by the United States Department of Labor that Georgia-Pacific violated ERISA § 404(a)(1)(D), 29 U. S. C. 1104(a)(1)(D) by failing to administer the SERP in accordance with its terms, and a claim by the IRS that the plan had an operational failure that would jeopardize its qualified status under Code § 401(a). Thus, given that the IRS had assured Georgia-Pacific that the SERP complied with applicable law, including the ERISA and Code provisions at issue in this case, Georgia-Pacific reliance upon the determination letter for assurance that the calculation of Lyons’ lump sum distribution complied with ERISA § 203(e) and Code § 411(a)(11) was entirely reasonable and should be upheld.

The accrual methodology utilized by the SERP is unquestionably age neutral. All participants, regardless of age, receive the same service credits and pre-distribution interest credits as periodic additions to their "accrued benefits. " All participants’ "accrued benefits" grow evenly over time; younger and older workers accrue benefits at the same annual rate, notwithstanding any difference in age.

The Lyons’ claim that the SERP must add post-distribution interest credits through normal retirement age would harm the intrinsic age neutrality in the SERP, as these credits would provide greater windfall benefits to some younger workers than to some older workers. A younger participant who elects to take an immediate lump sum distribution at termination of employment would, under Lyons’ theory, receive disproportionately greater post-distribution interest credits than an older worker would receive, simply because the older worker has fewer years until his normal retirement age.

For example, Lyons and the IRS would require the SERP to provide a thirty-five year old participant who terminates employment and elects to receive an immediate lump sum distribution with thirty years’ worth of post-distribution interest credits. However, a sixty year old participant under the SERP who terminates employment and elects an immediate lump sum distribution would only receive five years’ worth of post-distribution interest credits. As a result, the younger worker would receive a disproportionately greater windfall than the older worker, even though the SERP provides age-neutral service credits and pre-distribution interest credits.

This result indirectly contravenes a fundamental public policy that older workers should be treated no less favorably than younger workers in the terms and conditions of their employment. Congress expressly acknowledged this public policy when it adopted the Age Discrimination in Employment Act, amended by the Older Workers Benefit Protection Act of 1990 ("ADEA"), 29 U. S. C. § 623 et seq.

While it is clear that operating a cash balance plan in the manner advocated by Lyons would not violate the express terms of ADEA, as interpreted by the IRS and various courts, such operation can lead to less favorable treatment for some older workers and thereby undercuts the spirit of the public policy. Such a result cannot be squared with the strong public policy in this country that employers are not to treat older workers any less favorably than younger workers in the terms and conditions of their employment.

Cash balance plans are designed to benefit both a modern mobile workforce and a stationary workforce. Since these plans provide for the steady accrual of benefits over time, employees who switch jobs two or three times in their career and employees who remain with a single employer for their entire career both accrue the same meaningful retirement benefit. However, operating cash balance plans in the manner advocated by Lyons and the IRS destroys the steady accrual created by the cash balance plan accrual methodology because younger employees would have their "accrued benefit" increased by post-distribution interest credits through normal retirement age every time they switched jobs.

As a result, contrary to the very strong public policy in this country that pension plans reward employees’ continued service to an employer, a cash balance plan would instead reward an employee’s repeated termination of his services. Employees would have a financial incentive to hop from employer and employer as soon as they became vested in their cash balance plan benefit because, every time they terminate employment, their "accrued benefit" would include post-distribution interest credits through normal retirement age.

Thus, for example, a twenty year old worker vests in his first employer’s cash balance benefit at age twenty-five, terminates employment, and elects to receive a lump sum distribution that includes forty years’ worth of interest credits. The employee then vests in his second employer’s cash balance plan at age thirty, terminates employment, and elects a lump sum distribution that includes thirty-five years’ worth of post-distribution interest credits. The employee again vests in a third employer’s cash balance plan at age thirty-five, terminates employment, and elects a distribution that includes thirty years worth of post-distribution interest credits – and so on.

Accordingly, under the Lyons/IRS theory, a job hopping employee will ultimately accumulate a larger retirement benefit than an employee who remains with a single employer for his entire career. Creating an incentive for employees, through the operation of their pension plans, to terminate employment defies the underlying public policy of private pension plans – rewarding service. Such a result simply cannot be justified.

CONCLUSION

For the reasons addressed above, the District Court’s Order granting Georgia-Pacific’s motion for summary judgment should be affirmed.

Respectfully submitted, this 27th day of September, 1999.

 

 

___________________________

Howard J. Bashman, Esquire

Georgia Bar No. _________

Robert G. Chambers, Esquire Jeanne L. Bakker MONTGOMERY, MCCRACKEN,
WALKER & RHOADS, L. L. P.
123 South Broad Street
Philadelphia, PA 19109
(215)

Attorneys for Amici
Association of Private Pension
And Welfare Plans

CERTIFICATE OF COMPLIANCE AND TYPE SIZE

Counsel for Amici APPWP certify that this brief complies with the type-volume limitation set forth in Fed. R. App. P. 32(a)(7)(B). Under the provisions of the 11th Cir. R. 32-4, this brief contains ___________ words.

Counsel for Amici APPWP certify that this brief has been prepared using _______, proportionately spaced, _____________.

Howard J. Bashman, Esquire
Georgia Bar No. _________
Robert G. Chambers, Esquire

Jeanne L. Bakker
MONTGOMERY, MCCRACKEN,
WALKER & RHOADS, L. L. P.
123 South Broad Street
Philadelphia, PA 19109
(215)

Attorneys for Amici
Association of Private Pension And Welfare Plans

CERTIFICATE OF SERVICE

This is to certify that I have this day served a copy of the within and foregoing BRIEF FOR THE ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS AS AMICUS CURIAE IN SUPPORT OF THE APPELLEES FOR AFFIRMANCE OF THE JUDGMENT BELOW upon all counsel listed below by depositing same in the United States Mail with adequate postage affixed thereto to ensure delivery, addressed as follows:


Peter Q. Bassett
Gregory C. Braden
Jason N. Poulos
Alston & Bird, L. L. P.
1201 West Peachtree Street
Atlanta, GA 30309-3424


Bradford T. Yaker
Hertz, Schram & Saretsky, P. C.
1760 S. Telegraph Rd. # 300
Bloomfield Hlls, MI 48302-0183


Allen C. Engerman
Law Offices of Allen C. Engerman, Ltd.
666 Dundee Road, Suite 1200
Northbrook, IL 60062


Rex M. Lamb, III
Smith, Gambrell & Russell, L. L. P.
1230 Peachtree Street, N. E.
Suite 3100, Promenage II
Atlanta, GA 30309-3592


Stephen R. Bruce
555 13th Street, N. W. , Suite 3-W
Washington, D. C. 20004


Paula Brantner
Senior Staff Attorney
National Employment Lawyers Association
600 Harrison Street, Suite 535
San Francisco, CA 94107


Mary Ellen Signorille
Melvin Radowitz
AARP
601 E Street, N. W.
Washington, D. C. 20049


Loretta C. Argrett
Richard Farber
Curtis C. Pett
Tax Division
Department of Justice
Post Office Box 502
Washington, D. C. 20044


This 27th day of September, 1999.

JEANNE L. BAKKER