In its opinion, the appellate court said Xerox’s method of accounting for prior distributions in its calculation of retirement benefits violates the Employee Retirement Income Security Act (ERISA) by overestimating the value of the prior distribution and the corresponding reduction in benefits.
The Xerox plan, being a hybrid plan, must satisfy ERISA with respect to both defined benefit and defined contribution plans, the court said. For DB plans, ERISA requires that there be actuarial equivalence between a distribution and the accrued benefit it replaces.
The case was brought by three employees who had left Xerox in 1983, received a distribution of retirement benefits, and were subsequently reemployed. When the three asked for statements of the value of their benefits, the value had been greatly reduced due to their prior distributions.
At the time the three left Xerox, it had a retirement plan that consisted of an Income Guarantee Plan and a Profit Sharing Plan that worked together in a “floor-offset” arrangement. Upon termination, each participant would receive his or her Profit Sharing account benefit supplemented by the Income Guarantee benefit in the amount that it exceeded the Profit Sharing balance. According to the court document, the Profit Sharing account balance was the greater of the two for the three employees, therefore they received only a distribution of that account.
When recalculating their benefit, however, Xerox used a “phantom account” that calculated the prior distribution’s “present value” and deducted that from the benefit the participant was to receive. Xerox had since amended its plan to compare three different account balances and pay participants the higher of the three less the “phantom account” offset for prior distributions.
According to the appellate court, the accrued benefit attributable to the participants’ prior distribution was simply the Income Guarantee portion of the distribution and Xerox should not have used a “projected-to-the-present value.” The appellate court remanded the case back to the district court for further proceedings.
The Xerox plan has endured challenges as far back as 2001 when a federal judge ruled that benefits were miscalculated (See UpFront: Xerox: What Not To Copy ) and the company was ordered in 2002 to pay $284 million to some 25,000 retirees (See Federal Judge Backs Xerox Retiree Claim ). A 2004 decision in favor of Xerox was overturned this year, when the 2 nd US Circuit Court of Appeals determined that the company’s method for recalculating benefits violated ERISA’s anti-cutback rule (See Method of Offset for Prior Distributions Violates Anti-Cutback Rule ).
The 9 th Circuit decision in Miller v. Xerox Corporation is here .