COLAs Must be Included in Lump-Sum Benefits for DB Participants

August 15, 2007 ( - The 7th U.S. Circuit Court of Appeals has determined that cost-of-living adjustments (COLAs) provided to defined benefit plan participants who choose to receive their distributions in the form of an annuity must also be included in the calculation of benefits for those who choose to receive a lump-sum distribution.

In granting summary judgment to a class of retirees covered under the Rohm and Haas Pension Plan, the appellate court pointed out that ERISA and the Internal Revenue Code prescribe that if a defined benefit pension plan allows for a lump-sum distribution, that distribution must equal the present value of the accrued benefit expressed in the form of a single-life annuity.

Quoting a similar case, the opinion said, “When a participant in a defined benefit pension plan is given a choice between taking pension benefits as an annuity or in a lump sum, the lump sum must be so calculated as to be the actuarial equivalent of the annuity.”

Acknowledging that ERISA’s definition of accrued benefits typically directs one to look to the plan document, the court said the Rohm and Hass plan “seeks to disguise a penalty exacted against lump-sum recipients as a bonus afforded to annuitants.”

The court also concluded that it appeared that the plan attempted to write around ERISA’s limits by explicitly excluding the COLA from lump-sum distributions after learning of a district court case holding that a COLA is an accrued benefit under ERISA. The plan did this by labeling the COLA for annuitants as “supplemental benefits.”

By not including the COLA in the calculation of lump-sum benefits, the plan violates ERISA’s anti-cutback rule, according to the court opinion.

The Rohm and Haas plan provides participants with payment options of either a lump-sum distribution or a monthly annuity payment. The plan explains that the lump sum distribution is the actuarial equivalent of the accrued benefit, calculated using interest rates and mortality tables set by the Internal Revenue Code, and that COLAs are applied to annuities as an “enhancement” in order to account for inflation.

The plan calculates each year’s COLA based upon the previous year’s Consumer Price Index for Urban Wage Earners and Clerical Workers and limits each participant’s COLA to 3% of their annual benefit.

Gary Williams chose to receive his pension in a one-time lump-sum distribution. Six years later, he filed a class action suit against Rohm and Haas alleging that he was wrongfully denied benefits under the plan because his lump-sum distribution did not include the present value of the COLA he would have received had he chosen to receive his pension in the form of monthly annuity payments.

The district court granted summary judgment to Williams.

The opinion in Williams v. Rohm and Haas Pension Plan is  here .