9th Circuit Allows Offset of Pension Benefit by Loan Amount

October 31, 2008 (PLANSPONSOR.com) - The 9th U.S. Circuit Court of Appeals has shot down a highly-compensated former employee's attempt to limit the offset of his pension plan benefits by an outstanding plan loan.

According to EBIA, the highly compensated employee took loans from both his employer’s pension and profit-sharing plans, and one of the loans was secured by 75% of the employee’s benefit in the pension plan despite the 50% limit dictated by the Employee Retirement Income Security Act (ERISA). The appellate court said both the plan document and the loan documentation explicitly allowed the offset.

The court also noted that if the employee prevailed he would receive his benefits twice, saying “such a result would not serve the purposes of ERISA,” EBIA reports.

The former employee argued that the Department of Labor regulation allowing plans to consider no more than 50% of a participant’s vested accrued benefit as security for a loan also limited the amount the employer could offset his benefits distribution.According to EBIA, a trial court allowed the full offset, holding that it was necessary to avoid an “obviously unfair” result that would potentially damage the plan and all other participants.

The case is Reilly v. Charles M. Brewer, Ltd. Profit Sharing Plan and Trust, 2008 WL 4298571.