Cash Balance Challenge Defeated By Bank of America

An opinion handed down by The United States District Court for The Western District Of North Carolina, Charlotte Division, rules in favor of the defendant, Bank of America, which had been accused of profiting from imprudence and disloyalty in the management of a cash balance plan.

The case has had a lengthy and complicated procedural history, stretching back to a time before Bank of America even existed as such and calling out cash balance plan design/administration decisions made by then-NationsBank leadership. Most recently the case was revived and remanded by the 4th U.S. Circuit Court of Appeals, leading to the current decision.

Plaintiffs originally filed their cash balance plan lawsuit in 2004, claiming the way their employer created a cash balance plan by essentially transforming an existing 401(k) represented impermissible benefit cutbacks. After that, in 2005, an audit of the bank’s plan by the Internal Revenue Service (IRS) resulted in a technical advice memorandum order, in which the IRS concluded that the transfers of 401(k) plan participants’ assets to the cash balance plan between 1998 and 2001 violated relevant Internal Revenue Code provisions and Treasury regulations.

According to the IRS, the transfers impermissibly eliminated the 401(k) plan participants’ “separate account feature,” meaning that participants were no longer being credited with the actual gains and losses “generated by funds contributed on the participant[s’] behalf.” The IRS determination led a federal district court to move the participants’ case forward. However, the bank entered into a closing agreement with the IRS, paying a $10 million fine and setting up a special-purpose 401(k) plan to restore participants’ accounts. The district court determined that, following the closing agreement, the participants no longer had standing to sue.

The appellate court then determined that the plaintiffs in fact had standing to sue under Employee Retirement Income Security Act (ERISA) Section 502(a)(3), which provides that a plan beneficiary may obtain “appropriate equitable relief” to redress “any act or practice which violates” ERISA provisions contained in a certain subchapter of the United States Code. The court found that the transfers violated ERISA’s anti-cutback provisions, as determined by the Internal Revenue Service during a plan audit, and that the relief the plaintiffs are seeking—the profits Bank of America made from the assets transferred—is “appropriate equitable relief.”

On remand, the current decision comes down in favor of Bank of America. The full text of the decision outlines substantial expert testimony and other evidence marshaled by both sides, arguing whether or not the company ultimately benefited or suffered from the way it managed the plans in question. Ultimately greater deference was shown to Bank of America’s arguments that it actually suffered greater financial losses, rather than undue profits, as a result of its improper behavior than it otherwise would have. This was in no small part due to the fact that the bank’s retirement plan investment returns were dramatically impacted by the Great Recession.