Account Offset Not Mentioned in SPD Cannot Reduce Retirement Benefit

September 2, 2004 ( - If a "phantom account" set up for a prior lump-sum distribution is not mentioned in the summary plan description (SPD), it cannot be used to offset benefits received by an employee that returns to the employer.

Granting the plaintiff’s motion for summary judgment in part, US District Court Judge David Larimer of the US District Court for the Western District of New York ruled the Retirement Income Guarantee Plan (RIGP) must recalculate the participant’s retirement benefit without using a the “phantom account” offset.   The court found there was no way for the participant to know that the employer would be using the “phantom account” offset to subtract from the appreciated value prior to the distribution.

“[T]he conspicuous absence of any reference to or explanation of the ‘phantom account’ offset, coupled with the annual benefit statements that had been provided to [the participant], would clearly have misled him into believing that his monthly benefit would be considerably higher than it turned out to be,” Larimer wrote.

Case History

John Layaou voluntarily left his job at Xerox Corp in 1983 and elected to take the retirement benefits the he had earned up to that time, which amounted to a lump-sum distribution of approximately $22,400.   In 1987, Layaou was rehired by Xerox and subsequently laid off in 1994 through the company’s reduction in workforce program.   During his second term with the company, he earned additional retirement benefits.  

After being laid off in 1994, the plan administrator for the RIGP took into account the company’s 1983 lump-sum distribution by using a “phantom account” offset.   Using this offset, “a hypothetical account containing the original distributed sum plus the amount the distribution would have earned had it been invested,” the plan calculated Layaou’s monthly retirement benefit would be $162 per month.

After learning of his monthly payout amount, Layaou submitted a request for additional benefits, which was subsequently denied.   Layaou filed suit claiming the RIGP’s SPD violated the Employee Retirement Income Security Act (ERISA) since there was no mention of situations in which a participant’s benefits might be reduced in situations where an employee returns to the company.


Given the master plan document and the SPD were “inconsistent,” the court said in this situation “the SPD controls.”    Thus, “I believe the administrator should recalculate the plaintiff’s benefit without using any ‘phantom account’ at all,” Larimer wrote.

“The impact of the ‘phantom account’ offset is no minor detail,” the court said.   “It resulted in a significant reduction in plaintiff’s benefits compared to what he would have received without the offset, or with what he would reasonably expected his benefit to be, based on the information provided to him in the SPD.”  

However, the prior-lump distribution can still be taken into account, Larimer said, given that “even the faulty SPD indicated the participant’s ‘RIGP benefit may be reduced’ if he had a prior distribution.”    Thus, Larimer  ordered the RGIP plan to pay the plaintiff a lump sum in the amount of the difference between the amount of the benefits that the plaintiff has received and the amount of the recalculated benefit.

Further, the court ruled the employer is “not the proper defendant.”   Rather only the plan and the administrators and trustees of the plan should be held liable.  

The case is Layaou v. Xerox Corp. , Western District of New York, No. 95-CV-6388L.