High Court Leaves Employers Whipsawed

The nation’s high court had no comment on its refusal to hear the case, Lyons v. Georgia Pacific Salaried Employees Retirement Plan.   

Method-ology

Last summer the 11th Circuit held that employer Georgia-Pacific had, in fact, violated ERISA when it failed to use the IRS method of discounting a cash balance plan participants’ lump-sum distribution to present value.

The court found that as a result employees who left the company before reaching normal retirement age were severely undercompensated. 

Georgia-Pacific had paid participants the amount equal to their stated plan balances at the time of termination, as with a 401(k) plan. 

In making its determination, the court noted that since cash balance plans are actually defined benefit plans, payment amounts should be calculated using the same type of formulas used for these pension plans.  That involves projecting an employee balance ahead to their normal retirement date, using an interest rate specified by the plan, then discounting the amount back to the termination date using a Treasury-specified rate of interest. 

In the plaintiff Lyons’ case, he received a lump-sum distribution of $36,109.15 from the Georgia-Pacific cash balance plan. Under the Treasury regulation, Lyons contended that he would have received a lump-sum payout of $49,341.83.

Whipsaw

The IRS standards at issue are generally referred to as the “whipsaw” calculation. “To whipsaw” an opponent is to get the better of her with a two-sided strategy.  In this case, it refers to a two-step calculation that requires cash balance plan sponsors to annuitize participants’ lump sums and then convert the benefit back to a lump sum once more (Read MORE  at Whipsawed? ).

Employer groups have opposed the Circuit Court’s decision, claiming that the decision “retroactively” imposes pension obligations that the employer never intended, that most participants didn’t expect, and that the law doesn’t require. 

Supporters of the court’s ruling say that employers should abide by the existing rules.

– Nevin Adams                editors@plansponsor.com

For MORE on Cash Balance Plans .  You might also want to review The Basics on Cash Balance Plans.