Court Rules Against Trustees' Basis for Allocating Earnings

April 3, 2006 ( - The US District Court for the Southern District of Ohio has determined that a profit sharing plan's trustees unreasonably allocated losses to a participant's account without adjusting for a $1 million payment he had taken.

The court also rejected the trustees’ argument that the $1 million was not actually a plan distribution, but was a misappropriation by the participant of plan funds, BNA reports.   The court granted summary judgment in favor of the participant on the trustees’ counterclaim that he breached his Employee Retirement Income Security Act (ERISA) fiduciary duties by taking the $1 million distribution without making a request in writing.

Dr. Edward Kauffman, an employee of Sedalia Medical Center Inc., had made a request for $1 million of his profit-sharing plan benefits to be rolled into an individual retirement account.   As of December 2000, Kauffman had a non-forfeitable accrued benefit of $1,271,719, according to the court opinion.

When he retired in 2002, Kauffman made a request for the remainder of his plan benefits.   According to the court documents, a $146,269 distribution was made to him. Kauffman alleged he was underpaid by $99,742 because the trustees had allocated a loss of $151,039 to his entire account value.   He alleged that if his account had been properly adjusted for the $1 million payment, the allocated losses to his account for 2001 would be $51,297.

Kauffman sued the plan and its trustees, saying they violated ERISA by misallocating losses to his plan account. The trustees filed a counterclaim, alleging Kauffman breached his fiduciary duties as a former trustee of the plan and that the $1 million payment was not a distribution but a misappropriation of plan benefits.

The court denied the trustees’ motion for summary judgment, ruling that they acted arbitrarily and capriciously by allocating plan losses based on the entire pre-distribution balance of Kauffman’s account.

Further, the court rejected the trustees’ counterclaim, saying they treated the $1 million payment as a distribution, defeating their own argument.

The case is Kauffman v. Sedalia Medical Center Inc. Profit Sharing Plan and Trust,S.D. Ohio, No. 2:04-CV-543, 3/27/06.