4th Circuit Revives Case Over Transfers to Cash Balance Plan

The appellate court found that Bank of America’s closing agreement with the IRS did not make the case moot.

The 4th U.S. Circuit Court of Appeals has determined that participants in Bank of America’s cash balance plan still have a claim for relief for illegal transfers of their 401(k) account balances to the cash balance plan.

The appellate court first determined that the plaintiffs had standing to sue under Employee Retirement Income Security Act (ERISA) Section 502(a)(3), which provides that a plan beneficiary may obtain “appropriate equitable relief” to redress “any act or practice which violates” ERISA provisions contained in a certain subchapter of the United States Code. The court found that the transfers violated ERISA’s anti-cutback provisions, as determined by the Internal Revenue Service (IRS) during a plan audit, and that the relief the plaintiffs are seeking—the profits Bank of America made from the assets transferred—is “appropriate equitable relief.”

The 4th Circuit noted that the U.S. Supreme Court found that “[a] case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” The court said, “If an accounting ultimately shows that the bank retained no profit, the case may well then become moot.  But as long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot.” 

Finally, the court determined that the statute of limitations of 10 years under North Carolina trust law applied in the case. The first of the transfers in question took place in 1998, and the plaintiffs filed suit in 2004, so their claims are not time-barred by the applicable statute of limitations.

NEXT: Case background.

In 1998, NationsBank amended its 401(k) plan to give eligible participants a one-time opportunity to transfer their account balances to its defined benefit cash balance plan. The cash balance plan allowed participants to select investment options, but they were purely notional, and participants were credited with what their accounts would have received if invested in those options. The bank invested plan assets in investments of its choosing, and if those investments earned more than the return applied to participants’ accounts, the bank kept the difference.

The plaintiffs filed their lawsuit in 2004, seeking to obtain the profits the bank was keeping. In 2005, after an audit of the bank’s plan, the IRS issued a technical advice memorandum, in which it concluded that the transfers of 401(k) plan participants’ assets to the cash balance plan between 1998 and 2001 violated Internal Revenue Code § 411(d)(6) and Treasury Regulation § 1-411(d)-4, Q&A-3(a)(2). According to the IRS, the transfers impermissibly eliminated the 401(k) plan participants’ “separate account feature,” meaning that participants were no longer being credited with the actual gains and losses “generated by funds contributed on the participant[s’] behalf.”

The IRS determination led a federal district court to move the participants’ case forward. However, the bank entered into a closing agreement with the IRS, paying a $10 million fine and setting up a special-purpose 401(k) plan to restore participants’ accounts. The district court determined that, following the closing agreement, the participants no longer had standing to sue.

The appellate court reversed the district court’s decision and remanded the case for further proceedings.

The opinion in Pender v. Bank of America Corporation is here.