Compliance August 6, 2021

Citgo Annuity Conversions Challenged in ERISA Lawsuit

Echoing similar complaints filed against other large employers, the plaintiffs claim Citgo is failing to pay the full promised value of alternative annuity benefits defined by the company’s pension plan.

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A new Employee Retirement Income Security Act (ERISA) complaint has been filed in the U.S. District Court for the Northern District of Illinois’ Eastern Division, arguing the Citgo Petroleum Corp. has violated its fiduciary duties in the provision of pension benefits to certain employees.

In its allegations and factual background, the complaint closely resembles a sizable and growing number of lawsuits focused on the actuarial equivalence—or lack thereof—of different forms of annuities paid out by pension plans sponsored by major U.S. employers. Thus far, the cases have reached mixed results, with some being cleared for discovery, some being dismissed outright on technical grounds and others reaching rapid settlements. 

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In all the cases, including the new Citgo matter, the plaintiffs claim their employers are failing to pay the full promised value of “alternative annuity benefits” defined by the plan. The suits say this generally happens because the plan sponsors are allegedly using outdated mortality assumptions and interest rate calculations while converting standard annuity payments into alternative options, such as annuities that include spousal survivor benefits, also known as joint and survivor annuities (JSAs). Here, the plaintiffs allege Citgo is using mortality assumptions that are at least half a century out of date.

“When the [Citgo] plan converts a single life annuity [SLA] to a joint and survivor annuity, it uses a mortality table that is 50 years out of date, despite massive increases in life expectancy in the intervening decades,” the complaint states. “As a result, participants and beneficiaries [who elect a joint and survivor annuity] receive significantly less than the actuarial equivalent of their single life annuity, directly contrary to ERISA’s requirements. The defendants appear to have recognized that these actuarial assumptions did not pass muster. Effective January 1, 2018, they amended the plan to ensure that for those commencing benefits after January 1, 2018, the plan employs updated and reasonable actuarial assumptions. But for people who began receiving benefits before 2018, the defendants continue to employ punitive, unreasonable and severely outdated assumptions, which result in the class receiving less than their full pensions.”

The complaint goes on to suggest the plan’s governing document told class members that the assumptions used to convert a SLA to a JSA resulted in “actuarial equivalence.”

“This led class members to believe they were receiving benefits that are as valuable as the law requires, when in fact those benefits are less valuable than what ERISA provides,” the complaint states. “Similarly, defendants failed to inform class members that they are receiving benefits that are less valuable than what the law requires.”

Later on, the complaint details the pre-2018 annuity transformation formula in greater detail, noting that it used an 8% annual investment return assumption and a mortality rate defined using a unisex mortality table, blending 95% of the male rates and 5% of the female rates of the Society of Actuaries’ 1971 Group Annuity Mortality Table, with values projected to 1975. For beneficiaries, a unisex mortality table is also used, blending 5% of the male rates and 95% of the female rates of the 1971 Group Annuity Mortality Table, also with values projected to 1975.

“The mortality table employed by the plan is 50 years out of date, despite dramatic increases in longevity of the American public,” the complaint states. “Those increases are reflected in the mortality tables provided for by 29 U.S.C. Section 1055(g), which are updated routinely by the Treasury Department. Nonetheless, for those who commenced a joint and survivor annuity before 2018, the plan’s actuarial assumptions are outdated, unreasonable and result in paying JSAs that are less than the actuarial equivalent value of a participant’s single life annuity benefit.”

In addition to monetary damages, the complaint seeks to provide that class members receive the same updated actuarial assumptions that apply to those who commence benefits from 2018 on; to bring the plan into full compliance with ERISA; and to pay all benefits owed to class members based on the reformed plan.

The full text of the complaint is available here.
Compliance August 6, 2021

IRS Issues Guidance on Single-Employer DB Plan Funding Relief Under ARPA

It addresses to what purposes newly allowed segment rates apply, how plan sponsors can make elections for which segment rates to use and the effect of the law on hybrid plan interest crediting rates.

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The IRS has issued guidance related to the relief provided for single-employer defined benefit (DB) plans in the American Rescue Plan Act (ARPA).

The stimulus bill provides DB plan sponsors with the ability to extend the amortization period for funding shortfalls to 15 years from the seven years provided under the Pension Protection Act (PPA).

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In Notice 2021-48, the IRS says that for all plan years beginning after December 31, 2021, shortfall amortization bases are amortized over 15 years, and for all earlier plan years, all shortfall amortization bases are eliminated. However, a plan sponsor may elect to have this rule apply to plan years beginning after year-end 2018, 2019 or 2020, which could change the years for which shortfall amortization bases are eliminated.

Prior to the enactment of ARPA, the applicable minimum and maximum percentages for the 24-month average segment rates used in calculations for minimum required contributions and other things were 90% to 110% for plan years beginning before January 1, 2021; 85% to 115% for plan years beginning in 2021; 80% to 120% for plan years beginning in 2022; and a wider corridor for later plan years. Section 9706(a)(1) of ARPA changed those ranges.

The IRS notes that Notice 2012-61 specifies the items for which the adjusted 24-month average segment rates apply or do not apply. The agency says that guidance generally remains in effect following the enactment of ARPA but has been modified to reflect subsequent statutory changes and to take into account any election by a plan sponsor not to apply the ARPA segment rates for a plan year.

As an example, the IRS says, Notice 2012-61 provides that if the adjusted segment rates apply for a plan year, then those rates apply for the purposes of determining the minimum required contribution, including the calculation of target normal cost and funding target; the calculation of the present value of remaining shortfall and waiver amortization installments for purposes of determining any shortfall amortization base established in the current plan year; the determination of shortfall and waiver amortization installments; and the limitation on the assumed rate of return for purposes of determining the average value of assets. Therefore, for a plan year beginning in 2020, the ARPA segment rates apply for these purposes unless the plan sponsor has elected to apply the pre-ARPA segment rates for that plan year.

As for electing to use segment rates for a prior plan year, the IRS says elections may be revoked by filing, no later than December 31, an amended Form 5500, Form 5500-SF or Form 5500-EZ for the plan year, with a revised Schedule SB that reflects the use of the ARPA segment rates.

The IRS notes that ARPA will result in a change to the interest crediting rate for a hybrid plan that uses any of the three segment rates specified in Section 430 of the Internal Revenue Code (IRC). Sponsors of hybrid plans can make an election to use pre-ARPA segment rates. However, if they don’t, they may “apply a reasonable interpretation of plan terms … in determining when this change in the interest crediting rate takes effect.”

The notice also explains the manner and timing of making elections under ARPA, as well as the flexibility to redesignate contributions between plan years.

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